Which service providers should you engage when setting up a fund in Europe?

Before the financial crash of 2008-9, alternative funds in Europe were largely unregulated. As private deals in non-traditional assets between sophisticated investors, they were considered beyond the scope of most financial regulation. The crash changed that by exposing the systemic risk posed by the growing market for alternative investments and the sector’s lack of transparency. The result was AIFMD, which created a common EU regulatory regime for alternative investment managers.

For managers looking to launch funds in Europe, one of the most important consequences of AIFMD was the statutory requirement for an alternative investment fund manager (AIFM), along with a depositary. But the scope and complexity of AIFMD means that, in practice, other service providers are also essential to the smooth running of an alternative fund. Here are four partners you’ll likely find essential:

1) AIFM

The AIFM is responsible for ensuring compliance with AIFMD regulations for every AIF it manages. Its primary functions are to manage the portfolio as well as perform regular risk management, as well as additional services including valuation oversight, compliance and governance, plus due diligence and regular oversight on any delegates. 

Any investment manager looking to set up and distribute AIFs to European professional investors will need an AIFM, which can be their own proprietary AIFM or a third-party alternative. An internal AIFM can delegate investment management to another group or external entity, though most non-European based managers elect to use a third-party AIFM provider such as Ocorian which delegates investment management back to their firm.

2) Fund administrator

The fund administrator provides a domicile and corporate secretariat for your fund, while maintaining accurate records of the AIF’s transactions, portfolio assets and performance. It prepares regulatory filings, helps to ensure the fund is complying with all relevant laws and scans the horizon for regulatory changes. 

The fund administrator will also prepare reports for investors. Its services are frequently combined with those of the depositary. 

3) Depositary

A depositary is another mandatory requirement under AIFMD. The depositary is responsible for cash monitoring and management, safekeeping of assets and general fund oversight on behalf of the investors.

4) Legal and tax counsel

It’s vital to have a specialist law firm on your team as you decide on fund domiciles and legal structures, and secure authorisation from relevant authorities, if required. A team with experience in cross-border alternative investment structures can also help you align and integrate European entities with US or Cayman equivalents.

5) Independent auditor

European AIFs require that their books and records are subject to an annual audit by an independent auditor. The auditor will also ensure that accounting and valuation policies as per the fund documents are market standard.

Do you need to use third-party fund service providers, or can you do it all in-house? 

While it’s possible to replace many of the services third-party providers offer with in-house teams, it is extremely inefficient and costly in practice. AIFM responsibilities are very specific and third-party providers will already have the necessary expertise, technology and regulatory approvals and licences, as well as local boots on the ground. 

Similarly, fund administration is a specialist service requiring a wide portfolio of skills, from handling the ever-increasing complexities of investor KYC to tackling complex fund accounting subjects and ensuring a clean year-end audit of the fund. Taking it in-house requires a significant – and often prohibitive – investment in talent and technology. Managers outside Europe would also have to consider substance requirements, which third-party administrators can already meet.

Depositary is one area that is almost impossible to cover in-house, and those that try are likely to arouse the suspicion of regulators.  

How many third-party providers does an alternative investment fund need?

Managers can contract separate providers for AIFM, fund administration, depositary and accounting services, alongside a host of connected back- and middle-office functions. 

While this approach helps to spread risk, it also hugely complicates supplier management and can lead to disjointed service, if providers can’t or won’t work together or operate incompatible technology. 

That’s why many investment managers choose an all-in-one solution for AIFM, fund administration and depositary. A global provider can bring local knowledge, central coordination and economies of scale.

What should fund managers look for in a service provider?

Most importantly, a service provider should have experience establishing and maintaining all types of alternative investment fund structures in Europe, including in the asset classes relevant to the manager. If you’re moving into Europe from overseas, a global provider with teams across key fund jurisdictions can also be highly beneficial.   

You may need a complete AIFM, administration and depositary service, or you may need any combination of those things. Look for a service provider with the flexibility to tailor their offer to your specific requirements. 

Any provider should also offer a combination of top tier technology and human expertise. By bringing efficiency and accuracy to key elements of your European operations, the right partner gives you the time and bandwidth to focus on selling your strategy to the continent’s investor community.  

Ocorian Fund Services

At Ocorian we have extensive experience supporting US fund managers with setting up alternative investment funds in Europe and administering them throughout their lifecycle.

We have teams across seven jurisdictions in Europe that provide a high touch, technology first approach combined with local expertise.

We offer a full service offering from fund set up and administration through to fund accounting, AIFM, investor services and depositary.

• Fast and efficient set up of funds in Europe
• Teams based in the UK, Jersey, Guernsey, Ireland, The Netherlands and Luxembourg
• AIFM in Ireland and Luxembourg
• Expertise in administering vehicles parallel to existing US or Cayman structures
• Jurisdiction agnostic 
• Full service provider

Our business development team in the US will be happy to discuss your European requirements and guide you through the process. Contact us for more information.

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