Unlike the rest of Europe, Switzerland is still open for fund-raising
17 Apr, 2014
In the United States, it is not hard to find managers of Cayman-domiciled funds that have long since concluded that the Alternative Investment Fund Managers Directive (AIFMD) means European investors must either come to them (“reverse solicitation”) or be avoided altogether. A conversation with Roman Pelka of Montfort Capital, a Zug-based financial advisory firm specialising in alternative assets, furnishes a reminder that investors in Switzerland – still the single most important source of investment capital for fund managers in Continental Europe – can still be accessed by foreign fund managers. It is easy to forget that the country is not even part of the European Union (EU).
True, Switzerland has deflected criticism that it offers a way into EU markets without the burden of EU regulation by dutifully translating some version of European law into its own legal and regulatory codes. That is the price of keeping EU markets open to its banks and industrial and commercial companies. And the AIFMD is no exception. In March last year, the Swiss Federal government finalised revisions to the Collective Investment Schemes Act (CISA) and its accompanying implementation measures (the Collective Investment Schemes Ordinance, or CISO) to bring Switzerland into line with the AIFMD. However, it was executed in a fashion designed to prevent the new regime undermining Switzerland as an asset management centre.
“The changes to CISA mean the Swiss fund distribution regime is now similar to AIFMD, but it differs in a number of important details,” says Pelka. “They are making distribution only as difficult as it needs to be for the Swiss regulations to be compatible with the AIFMD but, essentially, the second largest alternative fund raising market in Europe is open for business.”
The new measures replace a previously liberal private placement regime, but still effectively allow hedge and private equity fund managers - indeed, any type of fund manager - to pursue “qualified” investors. These are defined by the CISA as financial institutions such as pension funds, corporates with a professional treasury department (such as a family office) and individuals with at least CHF 5 million in financial assets under certain conditions.
To access these investors, foreign funds are not required to set up Swiss corporate structures or to register with the local regulator, the Financial Market Supervisory Authority (FINMA). Under the new rules even the previously liberal private placement regime actually continues - but only if the investors are regulated financial intermediaries, which in practice means banks and insurance companies. This introduces a degree of complexity. As Pelka points out, it is not easy to work out whether the entity a fund is addressing as a potential investor is a regulated financial intermediary or not. The private wealth management arm of a Swiss private bank, for example, may not be a regulated financial intermediary, creating a risk of inadvertently failing to comply with CISA-CISO.
More importantly, adds Pelka, reliance on distribution to nothing but regulated financial intermediaries precludes a large proportion of the natural investors in alternatives. “It depends what your product is but, if you speak to regulated intermediaries only, you leave out a large part of the market – probably more than half of it if you are a hedge fund manager, and two thirds of it if you are a private equity manager,” he says. “It leaves out the most interesting investors for alternative managers, which are family offices and pension funds.” He proposes an alternative method of reaching these investors.
Family offices and pension funds in Switzerland are now treated as professional (“qualified”) investors, explains Pelka. Foreign funds aiming at these qualified investors are now required to appoint a Swiss “representative” to “represent” the fund to FINMA and the Swiss investors, and a paying agent (namely, a Swiss bank).
The representative must obtain a licence from FINMA but its duties are not onerous. They consist, essentially, of “oversight” of the manager and the fund, plus fulfilling certain information requirements. “Compliance is fairly easy, and fairly cheap,” says Roman Pelka. “If you raise $1 million out of Switzerland, the fees on that $1 million cover the cost of the representative and the paying agent.”
“Hedge fund managers will prefer to target only 'qualified investors,' by which I mean mean banks, pension funds and family offices, wealth managers and high net worth individuals,” explains Pelka. “Retail distribution is not necessary or even possible for most managers. By and large, if you appoint a representative and a paying agent, you can continue to speak to the same sorts of investor as you did under the old private placement regime.”
Better still, appointing a representative and a paying agent also leaves the distribution structure unchanged. Managers can continue to send in-house marketing staff, or third party marketers, to meet Swiss investors as long as they are subject to adequate supervision in their home market (in other words, they are registered with their domestic regulator).
There is, however, a deadline. Every foreign investment fund distributed to qualified investors in Switzerland must have appointed a Swiss representative and a Swiss paying agent, and comply with all the associated regulations, no later than 1 March 2015. Helpfully, as Pelka points out, the costs are low enough for the decision to be made without undue deliberation, especially if it leads to subscriptions.
Appointing a “representative” is also a lot cheaper than setting up a fully licensed asset management company in Switzerland. That would necessitate full compliance with FINMA rules, including corporate governance and internal procedural standards, insurance cover and meeting a minimum capital requirement of CHF 200,000. That said, a full licence might eventually entitle a manager to distribute Swiss funds throughout the EU. Since the CISA-CISO reforms do not include the remuneration constraints of AIFMD, a full licence may yet prove highly attractive to non-EU managers for other reasons.
As in the EU under the AIFMD, the new CISA-CISO rules will inevitably discourage some managers from recruiting investors in Switzerland. Others will be tempted to rely on “reverse solicitation,” but Pelka warns that is as risky an option in Switzerland as it is elsewhere. “The concept of `marketing’ is very broad,” he warns. “You do not have to fly to Geneva and meet people to fall foul of the Swiss marketing rules. The sending of presentations and fact sheets, or the advertising of a Swiss Franc share class on your web site, or meeting with Swiss investors in London, would all be considered marketing. Raising capital is hard at the best of times. Very few funds get approached by investors out of the blue. FINMA will take a narrow view of what 'reverse solicitation’ is.”