ManCo Due Diligence. Quick Facts for US Fund Managers

ManCo Due Diligence. Quick Facts for US Fund Managers

ManCos, a term most commonly used in the investment management world to refer to both UCITS management companies as well as authorised alternative investment fund managers, have been recently – once again – under the spotlight of the Central Bank of Ireland. The results of a thematic review carried out by the Central Bank of Ireland, published by the end of 2020, exposed vices and virtues of Irish ManCos.

The thematic review helps defining key performance indicators to be used when carrying out ManCo due diligence exercises. Whilst the findings of the review are applicable to Irish ManCos, these nevertheless highlight general areas of potential concern for the ManCo business as a whole.

Whether you are kicking the tires of third party ManCo providers for a first-time appointment or you are routinely evaluating the services of your current provider, it is now clear what criteria and parameters to look at when carrying out a ManCo due diligence exercise.

Get in touch here with your contacts at Veneziano & Partners to see how we can help with ManCo Due Diligence.

Governance and Risk Management

Even though many areas of concern exist when carrying out a ManCo due diligence exercise, the governance aspect remains undoubtedly the most important. Sound and robust governance is necessary as its effects disperse on all the functions carried out by a ManCo. And where governance generally refers to the entire set of controls, policies and procedures that dictate behaviors of corporations, in this context it has a set of specific ramifications due to the particular nature of the fund management business and the role played by ManCos.

The reason for governance to be one of the key criteria when carrying out a ManCo due diligence exercise can be found at the very foundations of the recent expansion of this segment of the industry – the introduction of AIFMD. Whilst the more stringent and granular rules introduced on the conduct of business by AIFMD did favor the mushrooming of an increasing number of ManCo service providers, it became very clear pretty quickly what ManCo providers poised to succeed had to offer. It wasn’t simply substance and/or risk management – as part of a broader group level offer for instance – rather the understanding and on-the-ground expertise in the fund management business, translated in a demonstrable robust governance framework.

And the existence of a specific ManCo related governance framework is even more important, according to the thematic review of the Central Bank of Ireland, for what concerns risk management. In the majority of cases, since the introduction of AIFMD, fund managers reached out to appoint external third-party ManCos for the provision of risk management services. The Central Bank of Ireland raised concerns with risk management frameworks implemented at group level, for instance, and then used for the ManCo portion of activities of the group. According to the standard set by the Central Bank of Ireland, risk framework and registers should be specific to the ManCo entities and operations and also typically include a risk appetite statement. Involvement of the board is also necessary as the risk governance framework has to be approved by the board and reviewed not less than on a yearly basis.

Resources and Delegates Oversight

The importance of the existence of demonstrable governance, when carrying out ManCos due diligence exercises, is also seen for what concerns the staffing of a ManCo, the oversight of the delegates as well as the so-called organisational effectiveness. Even though the considerations in this paragraph are more Irish specific in nature, the underlying principles can be easily extended to ManCo due diligence exercises carried out in multiple jurisdictions.

Given that ManCos are substance providers, they are required to ensure appropriate level of resources to effectively implement their operational frameworks. The minimum number of full-time resources varies of course, depending on the specific domicile where a ManCo is based. Also, most typically in Ireland, there are specific managerial functions broken down in a list of six essential functions, with a local designated person appointed to monitor each of these managerial functions. As some of these functions will most often be outsourced, the role of the full time locally appointed designated persons will also be to carry out oversight of the delegates and the delegated activities.

Demonstrable governance in this context translates in the quality of the board reporting provided by the appointed designated persons. The reporting should be comprehensive, demonstrate constructive challenge as well as interrogation of the information received by the overall staff of a ManCo. For what concerns delegated functions and delegates overall, it is important for a ManCo to provide supporting evidence that appropriate due diligence has been carried out on delegates both on an initial and ongoing basis. Demonstrable governance here means that when selecting delegates, to the maximum extent possible, due diligence policies and procedure implemented by the ManCo are used, rather than simply relying on the ones of the specific delegate. However, when relying on delegate due diligence policies, there should be evidence that the policies and procedures are evaluated and approved as being fit for the ManCo. Also, there should be evidence of a process to review the delegate policies and procedures.

Role of the Board

Last but not least, governance is especially important for what concerns the dynamics involving the board of directors of a ManCo. In the course of ManCo due diligence exercises it is of paramount importance to ask and receive clear and demonstrated evidence about the involvement of the board in the operations of ManCos, including requesting samples of standard board reporting.

The thematic review of the Central Bank of Ireland also sets an interesting standard on governance practices at board level. Especially in the context of third party ManCos, offering their services to various fund management houses, the involvement of the board of directors of the ManCo should be evidenced at the very early stages of each new fund launch. More specifically, the good governance standard being set is that the board should seek a presentation from the investment manager prior to the issue of the prospectus and launch of a fund in order to approve the investment approach as a whole. There is also an ensuing need to be able to evidence that discussions with the board at the early stages of formulation of the investment strategy have taken place and not only prior to submission of the fund application for approval.

Get in touch here with your contacts at Veneziano & Partners to see how we can help with Irish ManCO Due Diligence.

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