A Way Out of the Brexit Dilemma?

British fund providers may no longer sell fund shares in the EU after the UK leaves the bloc. Some of the affected companies consider collaborating with German third-party AIFM. This sort of collaboration offers an efficient and affordable way out of the dilemma.

“I do not expect to enjoy all the benefits of an EU membership without meeting all of its obligations,” British Prime Minister Theresa May told the German daily DIE WELT in September 2017. One of the major benefits of EU membership is the so-called passporting of financial products. What does this privilege imply? It means that a fond provider or a bank may market its financial product throughout the entire EU. The one precondition is that the fund provider be properlylicensed by the financial supervisory authority of its EU countryof origin. Once the British regulator, the FCA (Financial Conduct Authority), licensed a fund provider, the latter has so far been at liberty to market its products in any of the 28 member states.

This arrangement will probably come to an end once the UK has left the bloc for good. In legal terms, the British FCA would then become the supervisory authority of a third country, and a license from that authority would no longer automatically clear it for marketing within the in EU.

First Way Out: Setting up a Subsidiary in the EU

This will leave two options open for British fund providers who intend to keep selling overseas. Option one: They could form an offshore subsidiary in an EU member state and there register it as a fund under UCITS (Undertakings for Collective Investment in Transferable Securities) or as an AIFM (Alternative Investment Fund Manager). Preferred destination countries due to their favourable parameters include Ireland or Luxembourg. However, this option is rather a solution for larger players—for maintaining a subsidiary abroad involves serious resources and costs. According to experts, the assets under administration (AuA) would have to amount to at least one billion euros—depending on the EU country—to vindicate the expense of seeking an AIFM license. Second Way Out: Collaborating with a Third-Party AIFM inside the EU.

Second Way Out: Collaborating with a Third-Party AIFM inside the EU

The alternative would be to enter into a collaboration with an already licensed AIFM inside the EU—such as a third-party AIFM in Germany. Here is how the arrangement would work: The asset manager would be in the United Kingdom while the third-party AIFM would be domiciled in Germany, for instance. The latter would launch an investment fund in accordance with German law. Since the AIFM company would be licensed in Germany—and thus for the entire EU—the fund shares would be admitted for trading throughout the EU.

What does this model look like in detail? The third-party AIFM would provide all services involved in the formation and administration of the funds. It would handle the risk management, the portfolio manage- ment, the accounting, the reports to investors and supervisory authorities, the management accounting, among other this. The fund partner, meanwhile, would take care of the real estate end. As a demonstrable specialist in its market segment, it would commit its competence to the buying and selling of assets and to the running management. This distribution of responsibilities is not only efficient but also increasingly appreciated and sought among investors.

A large number of British real estate and property fund managers have already opted to pursue one of the two variants. INTREAL, as a major third-party AIFM in Germany who spe- cialises in property funds, has for years cooperated with asset managers who chose the second option for good reasons. But up to now, the collaboration did not use to be motivated by the Brexit: Rather, economic arguments, such as accelerated product development and implementation,proved convincing as did the maximum flexibility in productand client policy decisions.

Against the background of the approaching exit date of 29 March 2019, the market shows manifest interest among British property fund providers in collaborating with German third-party AIFMs. The advantages are perfectly obvious: Fund providers save the costs of setting up an EU subsidiary and its running overhead while being able to initiate their investment funds and sell their fund shares across the EU at the same time.