Niall Crowley is an Associate in William Fry’s Asset Management and Investment Funds Department, where he advises on the establishment and operation of both UCITS and AIFMD-compliant Irish domiciled investment funds. Recent significant work includes advising a US manager on the establishment of property funds and a French manager on the regulatory requirements applicable to its range of UCITS funds. He also regularly advises U.S. and European based investment managers and promoters on their suites of Irish domiciled UCITS and AIFMD-compliant funds. We sat down with him to find out why and when managers should consider to setup a UCITS Master-Feeder structure.
Ucitsindex.com: UCITS Master-Feeder structures have gained more traction lately with a few big asset mangers utilizing the possibilities. What does a Master-Feeder structure under UCITS look like?
Niall Crowley: The key features of a UCITS master-feeder structure include:
– A minimum of 85% of the assets of the feeder UCITS must be invested in the master UCITS. The remaining 15% can only be used to invest in: (i) ancillary liquid assets; or (ii) derivatives for hedging purposes only.
– The master UCITS may be a UCITS or a sub-fund of a UCITS which has, amongst its unitholders, at least one feeder UCITS.
– Cascade structures are prohibited, as such the master UCITS may not itself be a feeder UCITS. In addition, a master UCITS cannot invest into a feeder UCITS.
– A feeder UCITS is only allowed to invest in one master UCITS.
– There must be an agreement between the master and the feeder UCITS or internal conduct of business rules where the UCITS have the same manager.
– If the master and feeder UCITS do not share a common depositary or auditor, an information sharing agreement must be entered into between the depositaries or auditors (as the case may be).
Ucitsindex.com: What are the benefits of a master-feeder structure compared to having one single fund with cross-border distribution?
Crowley: A feeder can be established in a EU member state that suits the particular requirements of the distributor in that jurisdiction. The structure is also useful from a branding perspective as the feeder fund can be named according to the preference of the fund promoter or distributor while following the same investment policies as the other feeders in the master-feeder structure. Another advantage of the master/feeder approach is that there is a preference for local products in some EU markets for cultural reasons. For those markets or segments that have a preference for local funds the master/feeder structure would allow the generation of cost savings through the pooling of assets in the master while still providing a local fund. Master/feeder structures also offer significant potential to penetrate pensions markets as feeder funds can be adapted to meet a range of local tax and regulatory reporting requirements.
A number of asset managers have opted to utilise the master-feeder structure to rationalise their fund range because different tax arrangements across EU member states mean merging cross-border funds can be an expensive exercise.
The UCITS master/feeder structure makes it possible to centralise asset management activities thereby achieving economies of scale and the simplification of daily fund procedures.
It should be possible for asset managers to achieve significant savings in core operations and custody costs by replacing duplicate (clone) funds with one master and a number of feeders.
Ucitsindex.com: Are such structures only of interest for the biggest asset managers in Europe or at what size and investor structure can fund managers benefit?
Crowley: Large firms are best placed to take advantage of one of the chief benefits of the structure which is that it enables asset managers to take advantage of economies of scale. However, some boutique and mid-sized asset managers have established master feeder structures after undertaking an assessment as to the set-up costs and the assets likely to be raised through the structure.
Ucitsindex.com: From a practitioner’s point of view: when should alternative asset managers opt for a UCITS structure over an AIFM compliant fund and vice versa?
Crowley: The answer to this question is dependent on a number of factors such as:
(a) the investment policy of the fund – while UCITS funds are subject to extensive investment restrictions, an AIFMD-compliant fund has very few limitations on what it can invest in;
(b) the intended liquidity of the fund – UCITS investors must be able to redeem their units at least once every two weeks, whereas an AIFMD-compliant fund can be open-ended, open-ended with limited liquidity or closed-ended; and
(c) the borrowing and leverage required in the fund – an AIFMD-compliant fund will not be subject to any borrowing or leverage limit, whereas a UCITS can only borrow (on a temporary basis) up to 10% of its net assets and will typically be subject to a leverage limit of 100% of its net asset value.
Ucitsindex.com: Thank you for the interview.