Can a non-Luxembourg AIFM manage a Luxembourg fund as effectively as a local 3rd party AIFM?  

As this article shows, the answer is; Yes, but it depends.

A Luxembourg RAIF requires several services from its’ AIFM. Some of these are due to Luxembourg-specific applications of pan-European AIFMD rules, which some EU countries have different ways of implementing. This article tries to shed some light on the challenges and opportunities with a Luxembourg fund being managed by a non-Luxembourg AIFM. Two real-life experiences serve as illustrations.

A sponsor asked me to advise a new Luxembourg RAIF, to be managed by his in-house AIFM located in his jurisdiction. His local legal advisor insisted that that AIFM only needed to meet his local AML/CFT legal requirements and therefore did not need an RC, asset screening etc. This was not an acceptable interpretation of Luxembourg fund requirements, so I ended the cooperation.  

Shortly after, I was approached by another start-up fund with the same concept.

However in this case the CEO was someone I knew had managed funds in many jurisdictions, but not yet in Luxembourg, so I accepted and am to this day its’ happy chairman.

Through a combination of intelligent outsourcing and some own work by the experienced CEO, this combination of a Luxembourgian RAIF and an own AIFM resulted in a set-up with lower costs and better quality than most other solutions I have seen. Here is my interview with Gunnar Wiljander, the CEO who pulled it all together.

Gunnar has 38 years of experience in financial markets as CEO of HealthInvest, CEO of Tidan Capital, CEO of Nektar, consultant and advisor to hedge funds and institutional investors and as a banker to hedge funds with Skandinaviska Enskilda Banken (SEB)

Q: Gunnar, we worked together when you were launching a new fund that was to receive seed capital from a group of investors. You must have considered different set-ups and jurisdictions for both fund and AIFM. What made you decide that a Swedish AIFM run by yourselves, in combination with a Luxembourg RAIF was the right combination?

A: We spoke with peers in Stockholm and other Nordic countries. Their input on this combination was positive. I already had the experience of managing funds and running AIFMs in several other fund jurisdictions, so Luxembourg was just one more.  The RAIF format was appealing as it was known to our investors and less complicated to launch and run.

Q: What were your biggest surprises as the project progressed and you were getting to know specific Luxembourg requirements? Good and bad, please!

A: Good; Luxembourg’s past as a money laundering hub, meant it is probably extra clean now, which we like. The set-up process was smooth and not more expensive than in other jurisdictions. Together with a relatively straight forward AIFM-license process in Stockholm, the set-up project was very manageable. The complication of running a fund and the AIFM in two different jurisdictions and complying with two sets of requirements was not as complicated as was suggested by some Luxembourg Directors we met. Our selected Directors were experienced, and solutions-oriented, which helped.

Q: Did you ever consider the option of outsourcing to a Luxembourg-based 3rd party AIFM?

A: No. We never saw that as an alternative. We believed we could do a better job running our own AIFM so why pay for an external AIFM?

Q: What would you do differently if you were asked to lead another similar set-up project?

A: Nothing really. Maybe some Service providers would be different. I did the Corporate Secretary job myself which gave me better control than if we had outsourced it. We decided to hire two experienced Independent Directors. To our institutional investors, two Independent Directors are better than one.

Q: How did you decide which AIFM tasks you would do with your own staff/resources and which to outsource?

A: We looked at what we couldn’t do well ourselves and then looked for good providers. There are many specialist companies in Stockholm to choose from.

Risk function; We didn’t have the headcount to achieve sufficient independence of that function.

Compliance; We didn’t have the expertise to perform that.

Internal Audit; Same as Compliance.

IT; Cloud-based and better done by an expert

Fund Admin/Ops/Mid-Office/Treasury etc; It seemed a good choice to go with a large bank with resources and systems, so we did.

RC: An external Luxembourg-based RC was necessary.

Q: How many persons or manhours were needed to perform the AIFM duties towards the Luxembourg fund and towards your local regulator, Finansinspektionen (FI)?

A: Once it was fully operational, maybe 30% of my time, but of that only 1/3 ie 10% of an FTE, was additional work to meet Luxembourg requirements. The other 20% of my time was work I needed to do anyway to meet local requirements on any discretionary money manager. The marginal cost for our AIFM to run the RAIF was no more than 10% of my time.

Q: What are the pros and cons of running a Luxembourg fund with your own AIFM?

A: Pros; Control! We had full control over the entire process in-house.

Cons; You need good, experienced people. However, in Stockholm good admin/operations people are available, and employing them is better.

Q: If you were asked by another sponsor to think about setting up the same structure as you, what would your advice be?

A: Go for it! If you are an investment manager based in Stockholm and already subject to local regulatory demands, running your own AIFM has many benefits. Interestingly, our investors preferred this to an outsourced AIFM solution.

Q: What are your impressions of Luxembourg as a fund center and as a provider of some of your services; lawyers, compliance, auditors, banks, administration, TA, risk, etc?

A: Having a large bank provide many of these services helps, even when the actual work is done in different locations around the globe. For the rest, once up and running, I have no big complaints about the services we get from Luxembourg.

Q: Which other jurisdictions do you see as the strongest competitors to Luxembourg?

A: For seasoned institutional investors, Cayman for sure. Then Dublin and then a Swedish domestic fund solution. In that order. Luxembourg’s advantage is that it is the easiest to sell to EU investors.

Q: What could Luxembourg do to further improve its competitiveness?

A: A few things.

Costs need to be controlled better. Being presented with additional costs or automatic cost indexation is off-putting when service providers are making record profits and spending money on things that we don’t need. With growing AUM volume, costs should go down, not up.

Gold plating is a problem. The Risk-Based approach is actually applied as one-size-fits-all. Forcing managers to do far-reaching screening on listed large caps is just one example.

Language. All information and registers etc. should be available in English.

Thank you, Gunnar, for sharing your experiences!

Conclusion: For experienced fund sponsors, it is possible to do better and cheaper themselves, than outsourcing to a Luxembourg 3rd-party AIFM. Luxembourg service providers should see this as a challenge and inspiration to improve to be better.

Rikard Lundgren
Member of the Alternative Investment Funds Committee Working Committee