Is Covid-19 a game changer for funds distribution?

As one of the world's leading financial services centres for investment funds and management companies, with in excess of €2.9 trillion in assets under management held in Irish domiciled investment funds and an investor base from up 90 different jurisdictions, Ireland is well positioned to play an important role in the economic and social recovery post-Covid-19, according to Aongus McCarthy of Pinsent Masons Global Gateway.

“The Irish funds and asset management industry should look to position itself to tackle the challenges and take advantage of the opportunities for the sector presented by the ‘new normal’, including through the reform, establishment and structuring of investment limited partnerships, ESG focused funds and other sustainable finance initiatives and improved distribution opportunities,” he says.

The impact of the Covid-19 pandemic, in particular the social distancing and quarantine measures, have enforced significant changes and created significant challenges for the distribution models of all asset managers, he notes.

Senior management within asset managers are increasingly aware of the strategic importance of investing in technology

“From a client relationship perspective and in particular, there will always remain a need to engage with clients and prospects in person,” he says.

“However, Covid-19 has transformed the distribution landscape for the long term, with virtual meetings now a widely accepted and valuable component of the ‘new norm’ giving small and medium sized asset managers greater market access and distribution opportunities at reduced costs, whilst also meeting the expectations of IT savvy millennials, the next generation of investors. Virtual conferences and digital roadshow events will be a fundamental part of all asset managers’ distribution models in the future.”

Catalyst

McCarthy believes this has the potential “to act as a much-needed catalyst to help create a level playing field for fund distribution by giving small and medium sized asset managers, with smaller marketing and operating margins than their global competitors, access to investors and markets that they would otherwise be precluded from accessing due to cost restrictions and smaller sales teams.”

Covid-19 will also have a legislative and regulatory impact. "In light of the impending review of the Alternative Investment Fund Managers Directive (AIFMD) and recent Covid-19 related stresses, the European Securities and Markets Authority (ESMA), the EU's securities markets regulator, has written to the European Commission highlighting areas of the AIFMD framework where improvements are recommended. Many of ESMA's recommendations, if enacted, would also require consideration of changes to the UCITS legislative framework."

ESMA has highlighted the need for clarification as to the precise responsibilities of home and host supervisors in respect of cross-border marketing and recommended the increased use of digital communication methods instead of paper form.

ESMA has also recommended that clarification of the definition of “professional investors” under AIFMD for marketing purposes be introduced as part of the AIFMD review, with the caveat that any possible introduction of new categories of investors under the AIFMD, such as semi-professional investors, should be accompanied by appropriate investor protection rules and that passporting activities should be allowed only in relation to marketing to professional investors.

“Increased focus and regulatory attention have been placed on reverse solicitation practices in recent years in light of the varying practices and interpretation at national level,” McCarthy advises. “ESMA has again taken the opportunity to reiterate the importance of clarifying the notion of reverse solicitation mentioned in the AIFMD, with the long-term aim of achieving greater clarity on the definition of reverse solicitation to protect investors.”

Reforms

Smart outsourcing will be another feature of the industry in future.

“Senior management within asset managers are increasingly aware of the strategic importance of investing in technology and understand the benefits and costs of outsourcing solutions, which can represent substantial value to asset managers operating on a remote model,” he says.

Forthcoming EU regulatory reforms and initiatives for new rules on the cross-border distribution of funds will be one of the drivers of a move to outsourcing.

“The forces of globalisation and the impact of the Covid-19 pandemic are other key catalysts that are seeing asset managers focus on smart outsourcing solutions, such as global fund registration providers with technological solutions, to assist them in accessing target markets efficiently, to fully understand local marketing and registration requirements from dedicated experts and to ensure on-going compliance with national and EU regulations.”

One of the advantages of outsourcing is that it can fulfil the need for granular understanding of local distribution, registration and marketing requirements in each target country and ensure ongoing compliance with local regulatory requirements.

“Asset managers should be looking to position themselves to take advantage of the emergence of these new distribution channels, developing an adept understanding of the regulatory and marketing frameworks to access new markets and utilising smart-sourcing solutions to their advantage,” McCarthy concludes.