INDOS Financial appointed as depositary by Sure Ventures PLC
INDOS Financial Limited (“INDOS”), the independent UK depositary, has been appointed as depositary by Sure Ventures PLC (“SVP”), a venture capital fund that commenced trading on the Specialist Fund Segment of the London Stock Exchange on 19 January 2018.
SVP will invest in early stage software companies in the rapidly growing Financial Technology (‘FinTech’), Augmented Reality (‘AR’), Virtual Reality (‘VR’), and Internet of Things (‘IoT’) sectors.
Bill Prew, CEO of INDOS, said “We are delighted to have been appointed as depositary by Sure Ventures PLC. The appointment leverages our expertise as an independent depositary across a number of disciplines, including private equity/ venture capital strategies, and UK listed fund vehicles.”
Toby Raincock, CEO of Shard Capital AIFM LLP, SVP’s Alternative Investment Fund Manager, commented “We selected INDOS because we sought a depositary that would work independently alongside the fund’s other service providers and possessed the necessary full depositary regulatory status to support the fund’s strategy. The team was professional and pro-active throughout the fund set-up process and we look forward to working with them in the future.”
INDOS Financial specialises in providing independent AIFMD depositary services to alternative investment funds. INDOS was the first FCA authorised AIFMD Depositary in January 2014. Clients include EU and non-EU managers managing a broad range of open and closed ended alternative investment fund strategies ranging from hedge funds, to private equity, real estate and other closed ended funds such as UK investment trusts. The firm holds regulatory permissions to undertake both depositary-lite and full depositary business. INDOS’ team of experienced staff utilises its own proprietary DEPOcheckTM system, an integrated workflow management and automated monitoring solution to deliver efficient solutions to its clients. INDOS has been recognised as Best Depositary Solution for two consecutive years in the 2016 and 2017 HFM Service Awards.
Independent AIFMD depositary INDOS Financial looks back on 2017 for the AIMA Journal
This INDOS Financial article was first published in the latest edition of the AIMA Journal.
The depositary model, introduced in 2014 for many funds under the EU’s Alternative Investment Fund Managers Directive (AIFMD), is now firmly enshrined within the industry. The appointment of a depositary was not initially met with support among the alternative investment fund manager (AIFM) community, but many now recognise the value in the extra level of oversight being undertaken.
Equally, institutional clients, some of whom have lost money in the past through operational failings and frauds in the industry, have continued to welcome the additional protections which depositaries bring.
Independent depositary INDOS Financial looks at some of the major trends and developments that have impacted the depositary business over 2017, and explores what 2018 may hold.
The Independent Depositary Model Grows
As an independent depositary, INDOS has experienced solid growth in 2017 driven by several factors. Having seen fund launch activity fizzle out in the aftermath of Brexit and the uncertainty that followed, 2017 has seen a pick-up in start-ups coming to market. Whether this is a sign of renewed confidence in the fund management industry is unknown, but it represents a noticeable turnaround and it is a welcome boost. However, this must be tempered as several AIFMs have closed due to a combination of challenges with asset raising, rising costs, regulation, and market conditions.
Increased non-EU/ third country manager interest in soliciting money via NPPR (National Private Placement Regimes) in some EU markets has also increased demand for depositary services. This is partly because AIFMD equivalence discussions with third countries have stalled since Brexit prompting some non-EU managers to raise capital via the NPPR route, instead of holding out for passporting rights. While the registration process in some countries such as Germany and Denmark can be time consuming, several INDOS clients in the US and Asia have been rewarded for their efforts raising significant sums of institutional money.
At the same time, fund managers with existing depositary arrangements have continued to re-evaluate their provider relationships. This has arisen due to conflict of interest concerns at managers who are increasingly sceptical about whether depositaries affiliated with fund administrators, which represents most firms in the industry, can carry out their roles and duties without bias, unintentional or not. As such, some managers are questioning whether affiliated depositaries can offer the same value as an independent firm.
The decision to switch depositary providers is also a consequence of managers seeking improved service delivery. Several managers have reported that engagement by depositaries has been piecemeal, while others complain of basic fund administration errors being overlooked or not flagged for further scrutiny.
Institutional investor due diligence teams are also becoming more vigilant and focussing on the role of the depositary. Managers that have taken a “tick the box” approach to the depositary requirement are facing increasing questions. Given the swing in the balance of power from manager to investor over recent years, firms need to have a well thought out strategy to address these investor concerns.
Along with investors, fund directors are more active and vocal than they were a decade ago, with many now undertaking thorough assessments on service provider performance. Directors are comparing the service quality they receive from different depositaries across their funds. Given their fiduciary responsibilities, directors want to see depositaries offer real value and demonstrate they can be trusted to bring issues to their attention.
Directors are therefore taking more interest in what the depositary is doing and challenging the manager on their selections, resulting in an upswing in fund houses changing providers at the behest of their boards. Independent depositaries, which regularly engage with board directors, alert them to fund-level problems and exhibit sound judgement will be the chief beneficiaries.
This increased focus on depositaries has also partly been prompted by regulation. As far back as 2013, the Financial Conduct Authority (FCA) conducted reviews into asset managers’ outsourcing arrangements and specific attention was paid to how firms were effectively overseeing third-party relationships. Following this year’s FCA Asset Management Market Study (AMMS), managers are now facing scrutiny from the regulator about how they deliver value for money across the value chain including fund service providers, while senior managers will also become subject to greater accountability through the Senior Managers & Certification Regime (SMCR) later in 2018.
Depositaries – like other fund service providers – are also being asked to show that they have effective controls to manage IT and cyber security risks in addition to evidencing that their processes and controls more broadly are subject to independent review. Surprisingly, few depositaries undertake SOC 1/ ISAE3402 controls assurance reviews but are coming under pressure to do so.
Considerations for 2018
Fund managers are clearly facing some challenging regulatory headwinds going into 2018. On January 3, 2018, the Markets in Financial Instruments Directive II (MiFID II) will impose a range of new obligations on fund managers, with provisions around product governance, transaction reporting, bans on inducements and restrictions on using commissions to buy sell-side research.
Managers will then have to prepare for the General Data Protection Regulation (GDPR) which comes into effect in May 2018, and will require firms to ensure robust and thorough safeguards around how client and other personal data is used and stored. Both MiFID II and GDPR are significant pieces of regulation which require a lot of resources and focus from fund managers. Once managers have attained MiFID II and GDPR compliance, they will begin re-evaluating their depositary relationships and consider a change in provider.
AIFMD originally included a requirement that it must be reviewed by the European Commission by 22 July 2017. The European Commission has now started this review. Its purpose is to ascertain whether AIFMD’s initial objectives have been met, but also to qualify its impact on the alternatives industry and its institutional client base.
There are several areas that the alternatives industry would like to see reviewed and improved namely the introduction of more meaningful AIFMD leverage measures, more standardisation of cross-border marketing, and simplification of the Annex IV reporting requirements among others. The current depositary-lite model will continue to apply, despite initial expectations that it would be phased out from mid-2018.
The impact of Brexit on AIFMD and the depositary requirements is the biggest elephant in the room. The UK regulator has given no indication that it intends to roll back on AIFMD. The depositary is viewed by the regulator as a cornerstone of good fund governance. It is also supported by the investor community and taking away these protections would be a regressive step, potentially harming the UK’s reputation as a well-regulated international market and undermining its long-term ambitions to obtain equivalence with the EU.
Irrespective of what Brexit looks like, INDOS Financial believes the depositary requirement is here to stay.
INDOS Financial appointed depositary by Manchester and London Investment Trust plc
LONDON: 22 January 2018
INDOS Financial Limited (“INDOS”), the independent UK depositary, has been appointed as depositary by Manchester and London Investment Trust plc (“MNL”), an investment company with investment trust status that has been listed on the main market of the London Stock Exchange since December 1997.
MNL’s investment objective is to achieve capital appreciation and a reasonable level of income through a policy of actively investing in a diversified portfolio, comprising UK and overseas equities and fixed interest securities. MNL’s market capitalisation as of 18 January 2018 was £114.6 million, and it was ranked by FE Trustnet as the 3rd best performing UK investment trust in 2017 in total return terms.
Bill Prew, CEO of INDOS, said “We are delighted to have been appointed as depositary by MNL. The appointment validates our firm belief that independence of the depositary from other service providers to the fund enhances fund governance. The appointment is another step towards our aim to become a leading depositary to the UK investment trust sector and a genuine alternative to the traditional bundled service model within the industry.”
Brett Miller, Head of Governance at M&L Capital Management Limited, MNL’s Alternative Investment Fund Manager, commented “We selected INDOS because we were looking for an independent depositary that would add value to our business beyond simply enabling us to meet our regulatory obligations. INDOS took a proactive and flexible approach throughout the on-boarding process and we are looking forward to working with the team”.
For more information please contact:
Bill Prew, INDOS Financial Limited +44 (0) 203 319 1590
INDOS Financial specialises in providing independent AIFMD depositary services to alternative investment funds. INDOS was the first FCA authorised AIFMD Depositary in January 2014. Clients include EU and non-EU managers managing a broad range of open and closed ended alternative investment fund strategies ranging from hedge funds, to private equity, real estate and other closed ended funds such as UK investment trusts. The firm holds regulatory permissions to undertake both depositary-lite and full depositary business. INDOS’ team of experienced staff utilises its own proprietary DEPOcheckTM system, an integrated workflow management and automated monitoring solution to deliver efficient solutions to its clients. INDOS has been recognised as Best Depositary Solution for two consecutive years in the 2016 and 2017 HFM Service Awards.
Looking ahead to 2018: An independent depositary’s perspective
The last 12 months produced an eclectic range of challenges for fund managers to deal with. Aside from traversing various macroeconomic and geopolitical uncertainties, many were preparing themselves for further compliance obligations, a number of which have been or will be implemented over the course of 2018. INDOS Financial, the leading independent depositary provider to the alternatives industry, looks at what the year ahead may have in store for the asset management community.
AIFMD 2: A Review Begins
Article 69 of the AIFMD compelled the European Commission (EC) to begin a wide-ranging review of the Directive in July 2017, assessing its impact and effectiveness at achieving its stated objectives. Since then, a global consultancy has been appointed to undertake the AIFMD review, and it is currently soliciting industry comments and opinions from across the EU and a handful of designated third countries, which will form the basis of a report submitted to the regulatory authorities.
The outcome of the review is unknown, although industry professionals have urged EU regulators to introduce more meaningful measures around leverage, standardisation of cross-border marketing rules, and simplified Annex IV reporting requirements. It is entirely possible that such amendments to AIFMD could be proposed although this is unlikely to materialise before 2019.
The Preservation of Depositary-Lite
The depositary-lite model, which applies to EU based AIFMs marketing non-EU AIFs in the EU, was historically viewed as being a temporary solution during the interim period between AIFMD’s introduction in July 2014 and the switching off of national private placement regimes (NPPR) in 2018. NPPR will continue as the only route for marketing such funds in the EU as will the existing depositary-lite requirements. This is because there has been limited progress around finalising the extension of the AIFMD marketing passport to non-EU third countries, a key criterion for transitioning away from NPPR over time.
Lack of progress around extending the passport to third countries and the announcement of recent proposals potentially encumbering delegation have ignited tensions in the Asia Pacific (APAC) region. These actions could deter third country managers from launching AIFMs and UCITS and instead adopt more readily their own domestic fund passporting schemes. Regional passporting schemes in APAC, which are still in their infancy, may borrow from UCITS and AIFMD, including the depositary and depositary-lite concept, as they increasingly evolve and mature.
Flaws with the affiliated depositary model and the importance of the independent depositary
Depositary independence is being increasingly demanded by managers, fund directors and end investors as they look to break down the potential conflicts that exist with depositary providers affiliated with fund administrators, something which presents an inherent conflict of interest in their service provider oversight role. As a result, managers will continue to switch from affiliated providers to independents such as INDOS.
With the FCA adopting a proactive position on fund governance – as evidenced by its Asset Management Market Study’s (AMMS) focus on value for money and the introduction of the Senior Managers & Certification Regime (SMCR) – independent depositaries are likely to play an ever-expanding role in supporting best practices across the buy-side, in areas such as corporate governance.
INDOS also anticipates private equity and real estate asset classes, where corporate governance standards have fallen slightly behind hedge funds and traditional long only firms over the last few years, will make significant improvements to their oversight processes. INDOS is seeing and hearing evidence of a shift towards the use of independent depositaries in the private equity and real estate market.
Brexit and Depositaries
While the UK may be departing from the Single Market, the country is unlikely to expunge the basic AIFMD principles including depositary for local asset managers. Regulatory equivalence with the EU is much sought after inside the UK, and jettisoning the need for managers to appoint a depositary would diverge from achieving that objective.
Admittedly, the likelihood of a cliff-edge Brexit has receded in recent months, but UK depositaries should still be identifying ways and means by which to continue supporting EU clients. Under AIFMD and UCITS V, depositaries must be located in the same jurisdiction as the EU funds they are servicing. Most UK depositaries will have branches or subsidiaries distributed across the EU, but Brexit will force these providers to reorganise themselves if they want to retain EU clients.
Technology and Depositaries
Blockchain’s applicability in the depositary world is still not clear, although the technology is being evaluated across a number of INDOS’ counterparties and partners including prime brokers, custodians and fund administrators. At the most incremental level, depositaries may over time start to receive data from counterparties using Blockchain technology, something which will expedite cumbersome reporting processes and help eliminate mistakes.
Equally, depositaries could play a significant role in validating data on underlying assets and cash-flows reported onto a Blockchain by managers and their providers, adopting a governance role similar to that envisaged by market infrastructures in the securities services industry. Nonetheless, INDOS believes that further standardisation of Blockchain processes is required, an objective which is likely to take several years to achieve.
INDOS, however, sees enormous potential in artificial intelligence (AI) tools and is developing its proprietary DEPOcheck technology to employ AI to spot erroneous data sets or trends. By using AI software in an oversight capacity, depositaries will be able to spot and report errors more quickly and accurately, helping to strengthen investor protections and bolster confidence in the asset management industry.