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The 10 key steps in the process of switching to a new third-party AIFM provider

The 10 key steps in the process of switching to a new third-party AIFM provider

16 August, 2023
Funds AIFM

Switching or appointing a new third-party AIFM provider can present challenges, however these can be overcome with the help of the right new AIFM service provider.

Thomas Fahl, Head of AIFM at Ocorian explains the overall process below with some hints and tips to make the transition as smooth as possible.

What are the key steps in switching to a new third-party AIFM provider?

1. The decision phase

Once you have decided to switch AIFM, the starting point is to formulate a high-level transition plan.

This includes carrying out a risk assessment questionnaire and a thorough overview of existing data. It is important to rectify poor quality data and fill in any gaps so that the incoming AIFM is fully abreast of your organisation’s current state of play.  Most importantly, it will allow for a more efficient and smooth transition to the new AIFM provider, ensuring there will be no impact on business continuity.

Next, you should clearly identify current gaps in service levels and decide the immediate and long-term expectations from the new service provider. This will help with the design of a comprehensive and effective request for proposal (RfP). 

It is worth assessing the current AIFM market to identify possible new partners so that RfPs can be targeted to the most relevant organisations. This makes the procurement exercise more efficient and cost effective. Speaking to your existing service providers in the relevant jurisdictions can offer potentially valuable market intelligence and insight that goes beyond fees and track record.

Finally, draw up a roadmap for implementation that sets out key milestones, targets and objectives, and ensure there are personnel in place to oversee the transition at each stage. It is important to keep the roadmap flexible since there are many moving parts involved in an AIFM provider switch and you may need to adapt your transition plan accordingly.

2. Consult with legal counsel

Appointing a reliable law firm is paramount in ensuring a smooth switch to a new AIFM provider, and while you will likely have established relationships with existing legal counsel, it is necessary to ensure they are equipped to oversee the transition including specialist knowledge across all the relevant jurisdictions.

Engaging early with lawyers will uncover any potential sticking points and help keep the transition plan on track, especially where regulatory approval for a change in provider is required. 

To help manage legal costs, try to incorporate a periodic review and refresh of the prospectus as well as the other service provider contracts into the AIFM transition.

3. AIF Board approval

The board of the relevant Alternative Investment Fund must ensure that managers comply with relevant governance, regulations and guidelines, and that investors are protected, so you will need to seek their approval before making a switch.

The board will want to review the new AIFM’s qualifications, experience, and track record to ensure they are suitable, and they may also want to assess the impact of the change on the fund’s operations, performance, and risk profile.

In addition, board approval may be required to ensure that the prospective AIFM meets any regulatory requirements or restrictions, disclosure requirements, or other obligations.

4. Secure shareholder approval

It is important to consult with your legal counsel who will advise on the specific requirements and procedures for seeking shareholder notification and approval when switching AIFM provider, since the process will depend on the specific details outlined in the fund's governing documents.

Once you understand the requirements, notify shareholders of the proposed change either through a meeting, proxy statement, or other communication methods outlined in the fund’s governing documents.

Shareholders will need sufficient information about the new AIFM to make an informed decision about whether to approve the change. This information should include details about their experience, track record, investment strategies of the current funds under management, impact on the cost structure of the fund, and other relevant information.

Depending on the fund’s governing documents and relevant laws, a shareholder vote may be required to approve the change in AIFM. This vote may be held at a shareholder meeting or through a proxy voting process.

5. Plan for data transfer methods with the incumbent AIFM

Effective data transfer is essential when switching AIFM. Without proper records the new provider will have an incomplete picture of the fund's current holdings, current investors and performance, which can lead to delays and complications.

In addition, the new manager may not be able to properly evaluate the risks associated with the fund's investments or identify potential issues that need to be addressed.

In cases where relationships with the existing AIFM have broken down, it is incumbent on the initiator of the fund to ensure the incoming AIFM has access to all the data they need, and you may need to secure additional support to ensure a smooth transfer.

6. Engage tax advisors

Tax advisors can help ensure that the switch to a new AIFM provider is completed efficiently and complies with all relevant laws and regulations. This can help investors and fund managers maximise the benefits of the switch and avoid potential tax pitfalls.

All AIFMs distributing and marketing products in the EU fall under the Alternative Investment Fund Manager Directive (AIFMD), but within each underlying country there are additional rules that differ across jurisdictions.

Tax advisors should have specialist knowledge across all the relevant geographies.

7. Assess the new AIFM

Carrying out thorough due diligence on any potential AIFM partner is critical.

Start by researching the AIFM’s track record and investigate their experience and performance history across all the markets in which they operate.

Next review their regulatory compliance. It is crucial to verify that the AIFM authorised by the relevant regulatory authorities in the jurisdictions where they operate. Check their regulatory filings and confirm their adherence to regulatory guidelines and industry best practices.

Evaluate the AIFM’s team and resources ideally with an onsite, in-person visit. Investigate the qualifications, experience, and expertise of the AIFM’s key personnel, including the fund managers (if relevant), risk managers, and operational staff. Assess their ability to provide a high level of service and support to the fund and its investors.

Assess the AIFM’s approach to risk management and their ability to manage risks associated with the asset classes they have under management.

Finally, fully understand the AIFM’s fee structure and compare it to industry benchmarks to ensure it is competitive and aligned with the value they provide.

8. Communicate effectively with key stakeholders

Clear and timely communication is crucial to maintain trust among all relevant stakeholders through all stages of the switch.

Starting communication early and being clear open and honest about the reasons for the switch will allow stakeholders to ask questions and helps secure buy-in. 

You need to be willing to address worries or questions that stakeholders may have, consider creating an FAQ document or hosting a Q&A session to address common concerns.

Throughout the transition process keep lines of communication open; regular updates help to build trust and confidence in the process.

Make sure stakeholders have a designated person or team they can contact with any questions or concerns. This point of contact should be responsive and knowledgeable about the transition process.

After the transition is complete, follow up with stakeholders to ensure they are satisfied with the new fund management company and address any outstanding issues.

9. Dot the i’s and cross the t’s

The next stage is to negotiate and sign the AIFM agreement, along with contracts and service level agreements (SLAs), subject to regulatory approval where required.

With support from your legal counsel, ensure that the terms of the contract and SLA are clear and that you understand them fully.

The contracts should include clearly defined performance expectations, and the incoming AIFM should be transparent about their service scope, contractual obligations (and the limits thereto), fees and other relevant information.

It is also important to set the risk management policies against which the fund manager should regularly report. 

Finally, the contract should put in place the circumstances under which either party can terminate the contract or service level agreement.

In parallel, you will need to update your fund documentation including prospectus or private placement memorandum (PPM) and supplements.

10. Secure regulatory approval

Depending on the legal and regulatory requirements specific to your fund, the final and possibly most important stage before a switch is complete involves informing regulators, respectively securing their approval.

The specific requirements for notification can vary depending on the jurisdiction and the type of AIFM in question, so it is important to check with the relevant regulatory bodies to ensure compliance.

If the fund is regulated, every change to the governing document including the prospectus and PPM must be approved. For unregulated funds, the process is less onerous but in either case, you should seek assistance from your legal counsel.

There may be numerous notifications needed in different jurisdictions, all of which takes time and is dependent on the regulator. This is where the strength of your communication processes comes in to play so all stakeholders are informed of delays or complications.

What are some hints & tips for switching AIFM service provider?

  • Communicate with stakeholders as early as possible to avoid complications and secure buy-in.
  • Find advisers with specialist knowledge of switching AIFM.
  • Conduct thorough due diligence on any prospective AIFM, including meeting the provider in person.
  • Fully review and be sure you understand all the contracts and that service level agreements are fully aligned with your organisation’s needs.
  • Appreciate that many of the stages of a switch happen simultaneously and you will need requisite personnel and resources to keep the process moving.
  • Remember that working with an AIFM provider is a partnership. It is important that both sides are confident the relationship will work over the long-term.

“I’d strongly encourage you to do a thorough due diligence and to visit the AIFM’s office, meet the team and build a strong relationship from the get-go.”

Stephen Hickey, Head of AIFM, Dublin

Why are fund promoters selecting Ocorian’s AIFM services?

Ocorian is a specialist provider of AIFM services to private capital alternative investment managers.

Our AIFM teams are based in Ireland and Luxembourg and have extensive expertise in managing private equity, real estate, infrastructure, and private debt funds.

By having sector specialists amongst its team, the AIFM can ensure a smooth alignment on investment processes with the fund manager and offer expertise on complex risk and compliance matters. We provide the necessary substance, infrastructure, expertise and legal documentation in place in Luxembourg and Ireland to enable the fast and efficient set-up and launch of a new fund or migration from another provider.  This enables you to focus on capital raising, asset management and generating returns.

Why choose Ocorian AIFM Solutions?

Responsive & dependable service

Our teams understand the importance of a responsive service and n you can rely on us to deliver an accurate and dependable service.

Tailored service

We work as a seamless extension of your team and tailor our services to your specific needs.

Dedicated on-boarding team

Ocorian have a dedicated solutions and on-boarding team, that take on the heavy lifting and will take the pressure off you to meet the required timeframe.

100% retention rate

We have had a 100% retention rate of our AIFM clients over the past 15 years.

Expertise in alternatives

We have sector specialists on the team, in the areas of private equity, venture capital, real estate, infrastructure and private debt funds.

Global team

Our AIFMs in Luxembourg and Dublin are staffed by specialists in AIFMD, compliance, governance and accounting.  We are experienced in handling the day-to-day operations of an AIF in compliance with AIFMD and local requirements. Our AIFM teams are supported by 300+ funds specialists globally who offer multi-jurisdictional and time zone support to fund managers in the US, Europe and Asia.

Breadth of service

Ocorian are also authorised to provide fund administration services and real asset depositary services. As a result, we provide a seamless one-stop-shop solution so you can focus on delivering value to your investors.

Contact us

At Ocorian we are well placed to support fund managers in a review and potential refresh of your third-party arrangements.

For further information visit Ocorian’s AIFM services or contact our Fund Services’ Business Development Team to discuss your project.

For more information on switching your third-party AIFM, fill in your details below to download our guide: