Luxembourg’s third-party management companies (ManCos) are increasingly positioning themselves as regulatory problem solvers for all types of asset manager. This appears to be a burgeoning niche for the Luxembourg fund and asset servicing industry.
‘I see us increasingly as a governance solutions provider, of which the management company function is just a component,’ said Steve Bernat, Partner of ONE Group Solutions, a third-party ManCo. EU rules require UCITS and alternative funds to be managed by a ManCo. This can either be internal to an asset management firm or be a third party provider. At first this entity provided relatively basic corporate governance processes for running and distributing funds, and to be an interlocutor with regulators.
This role has changed considerably. ‘Ten years ago, the typical client of a third party ManCo would have been the smaller asset manager or bank that had no activities in Europe, said Martin Vogel, CEO of MDO, another ManCo. ‘Now you have some of the biggest names seeking a ManCo services provider outside of their own group,’ he said.
Expanding role
The role of ensuring regulatory compliance has expanded, with regulators seeking high levels of risk and liquidity management being conducted by the ManCo, and increasingly they have responsibility for areas such as the implementation of ESG policy. They are becoming all-purpose operational and distribution units, offering day-to-day intermediary services, managing relationships between the different parts of the fund distribution chain. This includes tasks such as reporting, production of key information documents (KIDS) and the like. They can also perform trouble shooting duties.
‘For example, clients come to us to seek guidance about what is changing in the regulatory environment, and we can also help with how best to address liquidity and ESG policy issues,’ said Vogel. Arnaud Bouteiller, CEO of Casa4Funds, another ManCo, said this was particularly relevant ‘on the alternative side, in terms of risk management, AML/CFT (anti-money laundering and combating the financing of terrorism) and valuation, often on behalf of clients outside Europe.’
Modular solution
They see ManCos providing modular solutions based on client need. For example, they could serve as a hub for the provision of ESG data, which can be expensive for individual managers to access on their own. Vogel says this role is being discussed by European regulator ESMA, who are mindful of how these costs ultimately have to be borne by the end investor. Bouteiller also mentioned an increase in the financing role when investments in real estate and private equity are being made. All three appeared keen to be seen as outsourcing options for tasks such as risk management and distributor too, even for the largest asset management houses who might traditionally have done this work in-house.
Technology options
Asked if FinTechs will enter this market, Bouteiller said: ‘I don’t know if a FinTech could become a management company, but ManCos must become FinTechs.’ This would either be through investment or partnerships. ‘I think we are only at the beginning of the evolution here, as ManCo-specific technology and technology providers have only emerged over the past five years,’ said Bernat.
Martin Vogel said his firm recently investigated how AI and blockchain could be implemented. However, he said the ManCo business is about ‘looking at the whole, and that’s not that easy to break down into pieces that could be managed by IT’. However Bouteiller saw a role for ManCo using technology to monitor AML KYC, registrar details, management, oversight, and more.
Consolidation to come
A recent report by KPMG estimated there are more than 300 ManCos in Luxembourg, with the largest 20% accounting for more than half of assets under management. Bernat hopes that regulators should be open to further consolidation. ‘It’s easier to oversee a number of larger management companies, than the hundreds of very small ManCos and AIFM›s that we have today.’
The panel predicted that the market would consolidate to leave a handful of global players having global reach, as demand will rise for increasingly full-function and multi-jurisdictional operations. Luxembourg has first mover advantage in this business, but Dublin and Singapore are also becoming increasingly active.