A road to AIFM
Obtaining an AIFM-license is expensive, drives complexity and is time-consuming. Once obtained, it adds layers of regulatory complexity, it is demanding and relatively costly to uphold. But it is worth having, especially if you would like to market towards non-professional investors or even foreign professional investors.
In today’s article, Permian would like to walk our readers through the process of obtaining an AIFM licence, and share our hands-on experience with the application process. An interview with Marianne Normann, CEO of Permian Fund Services.
Could you briefly explain why did you decide to apply for the AIFM licence?
It all started with the business idea, which today is called Permian Fund Hotel. It is a licence sharing platform, which enables qualified fund managers to operate under the AIFMD without applying for the licence on their own. It is making things easier and better, and most of all, within the framework of full compliance with the AIFM directive. So, to answer your question, we had to apply for the licence, to be able to share it with others. We did so, because we understood how difficult, expensive and time consuming it is to go through the application process alone, and we thought that making it easier could be a great business opportunity. And it is. The model isn’t new, it functions very well in Luxembourg and UK already. Thanks to Permian, it is now available both in Norway and Sweden as well.
So, what you are saying is that fund managers don’t need to apply for the licence by themselves, they can just use yours?
In theory, yes. In practice, it is not that everyone can check in to our hotel and use the AIFM designation as they want. We have a list of requirements which our customers need to fulfil to be accepted. And, there are of course fund managers who don’t want to use anyone’s licence- they would like to have it on their own, which is also a way to go.
Since you have been through the process yourself, would you have any advices for those who would like to obtain an own licence?
Absolutely. The list is long, but I would like to draw attention to some main elements. First, if you are going to apply for the AIFM licence, you need to be prepared for the costs that are associated with it as well as the element of time from senior management in your organisation. Further, you will be required to have a proper management/internal control system in place. Documenting your current operations as well as additional improvements can be quite time consuming and you need a framework for doing it. Before you are ready to file the application, you should make sure that you have the right people in place- these need to be people with quite extensive CV’s; people who could fulfil the organizational functions required by financial authorities. If you don’t have them yet, you need to find them – which may take quite a lot of time, and to keep them – which is of course additional salaries to pay. And lastly you must ensure capital adequacy in the license holding company as there is a capital requirement for AIF Managers.
What kind of competence does the FSA require?
A portfolio manager, for example. In our case, even though the larger share of portfolio management will be carried out by the customers of the Fund Hotel, the FSA had quite extensive requirements for the person covering this position at Permian as we would operate as a Fund Hotel and manage many different funds with different investment strategies. In general, the requirement for the person covering the portfolio manager position is that he should have experience from a similar company with their own licence. And he or she needed to have done it in at least two of the five last years. This was probably the biggest cost associated with the set-up. In addition you need a well qualified risk manager.
Could you explain what does the management system need to contain to be operational enough for granting the licence?
In general, it should not only serve the purpose of getting the AIFM licence, it should serve your organization in operating and minimizing the risks that might arrive in the future. It would be too much to talk about it all for the purpose of this interview, but we have actually written a really nice article about the solid management systems and how to implement them, which I invite everyone to read [link here]. When it comes to the fulfilling the purpose of the AIFM-application alone, the requirements introduced via the Alternative Investment Fund Manager Directive are to present policies covering risk management, remuneration, liquidity management, conflict of interests, due diligence processes, valuation, reporting and compliance. So, there is quite a lot to think of and to make sure that the policies and procedures are also being implemented and followed up.
In order to get our licence, we had to improve the existing system we had in the Permian Group to fit this operation of a Fund Hotel. We had to go through every procedure, routine and policy to make it fit and maybe add some extras on those that we already had. These were many internal hours, and we were only adjusting what we already had in place from before. I think if you wanted to build the management system from the bottom, you could probably get someone to put a standard package in place for you, but then you probably haven’t made it operational as it doesn’t exactly fit to your organization. I think you can get those for around 100’-200’NOK, but then you must work with it to make it your own. In the end, a cost of 300’-500’ is not unlikely to get a solid AIF-compliant management system in place.
Any other documents to think of?
Of course, we have just started. Other than the management system, the Financial Authorities will want to see the business plan, investment strategy, details of outsourcing and all the agreements with third parties, types of funds that will be serviced and intended marketed and any passporting to be carried out. It is quite a lot of paperwork, and many questions are asked by the FSA before the licence is granted. In our case, the FSA had quite a few very good questions, which made us think through our model. It was great and very helpful, so in the end, even though it was time consuming, it was a good process. So, to give you the third advice, I’d say you should account for a much longer application process than what you initially intended.
How much time did it take to get the licence?
I would say almost a year. Okay, maybe a little less. We got the idea in the end of 2015, but we really started preparing the board and working on the documents in the beginning of 2016. We started the process with the FSA quite early in 2016, and we got our licence in the end of September. So, it took maybe 8 months from the day we pushed the button until we had it. There were quite a few rounds back and forth discussing with the FSA, as we had new business model compared with the standard manager who would do both portfolio management and risk management- and maybe outsource the latter.
And the cost?
The majority of the cost were definitely the internal hours we had to spend on producing the documents. We also used a legal counsel to help us discuss and respond to some of the questions that came from the FSA. I haven’t counted the hours we have used, but total cost was probably up to a million NOK. This can be quite a lot of money, especially for the smaller fund management companies. It may become too expensive to bear their own licence, as they are facing costs associated with applying and carrying the licence after they have got it.
So, what would be your final advice then?
Sharing infrastructure, of course! It is much more cost efficient and faster to do it that way. As a part of the quality sharing economy, fund managers can focus on what they are the best at- finding the investors and the investments. We, Permian Fund Hotel, will do the rest- we will handle the FSA, we will take care of the risk management and compliance part of the set-up, which also includes thorough follow-up on our outsourcing partners for portfolio management and marketing. We think that’s a good model for the smaller managers. If you are a large manager, you can probably bear this licence by yourself, but often it is too expensive for the smaller ones. Permian Fund Hotel is a good business opportunity by enabling everyone to share the infrastructure that we have built up from the scratch. Permian Fund Hotel is faster, easier, better and cost efficient compared to apply for a separate AIFM licence.
If you would like to learn more about Permian Fund Hotel, click here.