Gateway To The European Union - Hong Kong presentation by Gibraltar Finance

Gateway to the EU

WITHIN THE EUROPEAN UNION SINGLE MARKET

gibraltarfinance.gi

AIFMD Overview & Marketing vs Reverse Solicitation Joey Garcia

Adrian Hogg

James Lasry

Partner

ISOLAS

Grant Thornton

Hassans

European Union

Single market with 28 countries Gibraltar Finance Centre in EU Freedom of movement of: 1. 2. 3. 4.

Persons Goods Services Capital

EU Statistics Inhabitants • • • •

EU US China India

500 million 320 million 1.357 billion 1.252 billion

Global

Wealth

Global

7% 4.5% 19% 17.5%

$17.958 trillion $16.768 trillion $9.240 trillion $1.875 trillion

23.8% 22.2% 12.2% 2.4%

Hong Kong Hedge Funds* *Hong Kong SFC

• AUM as of 30 Sep 2014 = US$120 billion • 13 x increase from 2004 AUM = US$9.1 billion • Investors:  EU = 17.7% = US$21.24 billion

AIFMD Overview Alternative Investment Fund Managers Directive (â&#x20AC;&#x153;AIFMDâ&#x20AC;?) imposes harmonised conditions and requirements on the structure and operation of AIFMs in return authorised AIFMs will be able to market AIFs to professional investors across the EU

AIFM = Manager AIF = Fund

AIFMD – What’s new?

 Conflicts of interest

 Annual audited reports

 Risk management

 Reporting obligations to regulator

 Liquidity management  Organisational requirements (Four-eyes/staff)

 Requirement to have a depositary

AIFMD – What’s actually new?

Some NEW requirements imposed by AIFMD  Capital requirements  Self-managed: €300,000  External managers: €125,000  Plus 0.02% on amounts exceeding €250 million AuM  Delegation requirements  Gibraltar taking a flexible approach to “letter-box” provisions  Remuneration  40%-60% that deferred for 3 to 5 years and at least 50% in shares of the AIF concerned  Gibraltar will adopt the FCA approach of proportionality to disapply these specific provisions with respect to smaller managers  Local depositary  Not relevant until July 2017  UCITS V – introduction of depositary passport?

Three Options Reverse solicitation: NOT MARKETING “on its own initiative”

National Private Placement Regimes (“NPPRs”): Marketing in a specific member state via respective member state NPPRs

“Small AIFMs” “Non-EU AIFMs (Art. 42)”

Passporting: EU wide marketing to professional investors in all 28 member states with the marketing passport “In-Scope (EU and non-EU)”

GOLD STANDARD

Marketing vs Reverse Solicitation Marketing

Reverse Solicitation

Article 4(1)(x) of AIFMD:

Recital 70 of AIFMD:

“’marketing’ means a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to investors domiciled or with a registered office in the Union”

“This directive should not affect the current situation, whereby a professional investor established in the European Union may invest in AIFs on its own initiative, irrespective of where the AIFM and/or the AIF is established”

Marketing via NPPRs (without passport) UK

Holland

Sweden

France

Germany

Marketing via

Notification

Approval

Commencement of marketing

From notification

From approval

Depositary requirement

Yes

Undertake careful due diligence as marketing regimes are not fully harmonised

Passporting “GOLD STANDARD” EU wide marketing to professional investors in all 28 member states with the marketing passport

Access to market of 500 million people Access to market of 23.8% of global wealth “In-Scope (EU and non-EU)”

Compliant, safest and most efficient

Penalties for Non-Compliance • AIFMD does not set out specific penalties or sanctions for breach of the marketing restrictions. • Left for individual Member States to determine what punishments are appropriate.  Regulatory  Civil  Criminal • In the UK (for example) when an AIFM unlawfully markets an AIF such unlawful marketing qualifies as a criminal offence. • Risk of private law actions from investors who may claim that the AIFM engaged in unlawful marketing or may rescind the contract.

EU Solutions

 EU AIFM

 Non-EU AIFM

 Small AIFM

Gibraltar’s Fund Regime

Gibraltar Finance Centre: AIFMD, the Gibraltar option

Joey Garcia www.gibraltarlawyers.com

EU AIFMD CaseStudyandanalysis:requirementsand options

So……what are the main questions? 1. What is the effect of AIFMD on a Hong Kong based manager of a Fund today, and moving forward? 2. What are the options for access to professional investors in the EU both now, and in the future? • Understand limits on reverse solicitation, marketing and private placement long term • Build or Buy?

Non-EU routes to Europe Howandwhenareyoucaptured? Hong Kong Manager

Managing EU AIF Delegation arrangements (subject to AIFMD requirements)

From 2013

AIFMD – Management Passport

From 2015

+ Delegation arrangements

AIFMD – Management Passport + Delegation arrangements

From 2018

Marketing AIF in the EU Private Placement (subject to additional AIFMD requirements

AIFMD – Marketing Passport + Private Placement

AIFMD – Marketing Passport + Private Placement??

AIFMD: Establishment, Key themes and business impact • • • •

Functionally and hierarchically separate Due diligence investments Limits on leverage Stress tests

• • •

Cash flow monitoring Monitoring role and custody Liability

•

Includes senior staff incl. senior management, portfolio manager and functions with an impact on risk profile Multi year framework, and variable elements, at least 40% deferred over 3 to 5 years

•

Policy: adjustment needed to included further disclosure on Preferential treatment Extension of scope

•

• • • • • • •

Markets and instruments Illiquid assets, actual risk profile and risk management tools Results of stress tests Leverage Systemic risk information Externally managed: EUR 125.000 when more than 250 min AUM, 0.02% over this, capped on EUR 10 min

•

Guarantees for independent valuation Functionally independent from portfolio management

•

• • • •

Objective reasons No letterbox entity Co-operation agreement Monitoring role manager

AIFMD: The Build option HongKongManager–Sub orover100mEURGibraltarorEuropeanAIF,GibraltarAIFM

Gibraltar AIFM

Hong Kong Delegated Manager

Gibraltar/EU Investment Fund • • • •

Understanding key management functions Understanding the application procedure and requirements Core and Non-Core functions Understanding substance requirements

Delegation under AIFMD Understanding theoperationandlimitations ofdelegation Understanding objective reasons for delegation,

• Understanding delegation under AIFMD • Objective reasons • Letter box restrictions • Effective supervision

AIFMD: The Buy option HongKongManager–Sub orover100mEURGibraltarorEuropeanAIF,GibraltarAIFM

Gibraltar AIFM Provider

Hong Kong Delegated Manager

Gibraltar/EU Investment Fund Result • Working solution • Pass-porting, selling to professional investors and long term planning option • (Subject to conditions, substance, qualifying criteria and limitation of amount of tasks delegated)

AIFMD: Establishment, Key themes and business impact • AIFM

• AFIM

• AIF requirement • AIFM

• AIFM

• • • • •

Portfolio management is delegate Objective reasons No letterbox entity Co-operation agreement Monitoring role manager

Summaries Fund distribution across Europe, access to European Clients, and provision of cross borders servicesrequiresaction.

• Understand action points and options • Consider the alternative options. Plan for the long term • Innovate and collaborate – We are here to help

Non-EU AIFMs & Small AIFMs (below scope) Presentation 9 July 2015 Adrian Hogg Partner Grant Thornton Gibraltar

Non-EU AIFMs Active EU Marketing Passport NPPRs (private placement) Passive Reverse Solicitation

EU Marketing Options 2013 - 2015 •

Private placement

2015 - 2018 • •

EU marketing passport Private placement

2018 onwards • •

EU marketing passport Private placement ??

EU Marketing Passport

22 July 2015 By 22 July 2015 ESMA is required to report to the European Commission on the extension of the EU marketing passport to non-EU AIFMs.

Regulatory

Depositary Capital requirements Remuneration Risk management Liquidity management Valuation Reporting

Increased Regulation

Total Expense Ratio (TER) Depositary Policies Procedures Valuation (external valuer) Reporting

Increased Cost

Member State of Reference Will be determined by: • where most AIFs established • where AIFM intends to develop most effective marketing Member States jointly decide

Loss of Control

EU Marketing Passport

EU AIFM CONTROL: • • •

Regulation Cost Member state of reference

Non-EU AIFM • • •

Regulation (whole structure) Cost (total expense ratio) Member state of reference (loss of control)

Marketing via NPPRs (private placement) Marketing via Article 42 Three principal requirements

Articles 22, 23 and 24

• • •

Comply with Articles 22, 23, 24 and 26 to 30 Appropriate co-operation agreements in place between EU and non-EU competent authorities Non-EU AIFM and non-EU AIF (as applicable) is not a non-cooperative country

Annual reporting Disclosure to investors (transparency) Reporting obligations (to competent authorities)

Articles 26 to 30 •

Obligations for AIFMs that acquire non-listed companies

Marketing via NPPRs (private placement) UK

Germany

Marketing via

Notification

Approval

Commencement of marketing

From notification

From approval

Depositary requirement

Yes

Undertake careful due diligence as marketing regimes are not fully harmonised Member States may impose stricter rules on the non-EU AIFM in respect of marketing in their territory Potential regulatory, civil and/or criminal liability for marketing rule breach

Extensive due diligence required

Marketing via NPPRs (private placement) May 2015 (www.ft.com) “550 private equity and hedge fund managers from outside the EU have registered to market their funds in the UK” 263 are from the US; 14 from Hong Kong and Singapore

Small AIFM (below scope) Open-ended AIFMs who manage AIFS of less than €100 million

Article 3 Closed-ended AIFMs who manage unleveraged closedended AIFs (no redemption rights within 5 years) of less than €500 million

If exempt only Articles 3(3), 3(4) and 46 apply

Small AIFM (below scope) Regulatory Article 3(3), 3(4) and 46

Marketing Via NPPRs (private placement)

Cost

Limited regulatory impact

Light Regulation Ability to Market

Low Cost

Small AIFM (below scope) FUND TYPE Non-EU Cayman Islands Fund

Hong Kong Fund

BVI Fund

Irish Fund

Gibraltar Fund

Luxembourg Fund

Small AIFM (below scope) EU Special Features

• EU compliant

• OECD compliant • Can opt-in to AIFMD Gibraltar Fund

• Some NPPR advantages (Germany) • Segregate EU regulation within an EU fund

Small AIFM (below scope)

Gibraltar Fund Parallel Fund

Segregate EU regulation within an EU fund

• Private equity • Real estate

Feeder Fund

• Feed to master fund • Feeder and master (below scope)

GIBRALTAR’S FUNDS REGIME

James Lasry Partner & Head of Funds

Gibraltar fund structures

 Open / closed ended investment companies  Protected Cell Companies (PCCs) (statutory segregation of cells)  Limited partnerships  Unit trusts

Protected Cell Companies

Your Fund PCC Limited

Cell A European Equities

Cell B Global Fixed Income

 Liabilities attributable to each cell of the PCC will be statutorily segregated from those of other cells.  Cells may have different investment strategies and fee structures.  No limit to the number of cells.  The PCC is the legal entity. Cells do not have separate legal personality.  Cells can be open-ended, closed-ended or a mixture of both.

Gibraltar fund regimes

 Private Funds  Experienced Investor Funds (EIFs)  Super EIFs - AIFMD compliant  Non-UCITS Retail Funds  UCITS Funds

Private Funds

 A private fund is not licensed, authorised or regulated by the Financial Services Commission.  FSC must be notified on launch and annually.  Private funds can only be promoted to an identifiable category of persons whose number is less than 50:  Family, friends and close clients  Family offices  Managers seeking to establish track record  Investors must have sufficient information to make an informed investment decision, i.e. PPM.

 No minimum investment.  Private funds can not be structured as protected cell companies.  A private fund can be converted into an EIF after one year.

The Experienced Investor Fund Regime

DEFINITION OF EXPERIENCED INVESTORS: An “experienced investor” is defined as:  An investment professional;  An individual with a net worth (together with spouse) exceeding €1 million excluding residence;  A participant who invests €100,000;  A participant who invests €50,000 and is professionally advised;  A professional client as defined under MiFID.

EIF requirements

ELEMENTS OF AN EIF  2 Gibraltar resident directors authorised by the FSC

 Gibraltar based Administrator or authorised foreign administrator  Annual audit by a Gibraltar registered auditor  Offer document complying with the Financial Services (Experienced Investor Funds) Regulations 2012  Custodian need not be in Gibraltar

 Can be self-managed  Investment Manager can be domiciled anywhere in the world as long as it is authorised to provide investment management services in its home jurisdiction  EIF Launch  Pre-authorisation launch – submit documents to FSC within 10 business days of launch  Pre-launch authorisation – submit documents 10 business days before launch

Advantages of an EIF in Gibraltar

 Quickest time to market in EU  Only EU jurisdiction to have pre-authorisation launch option  Competitive costing  No statutory investment or borrowing restrictions  Fully tax neutral  Access to EU Parent Subsidiary Directive  Can elect to check the box for US tax purposes  No withholding tax  Common law jurisdiction (English – mother tongue)  Appeals to UK Privy Council (same as Cayman Islands and formerly Hong Kong)  Listing possible (Gibraltar Stock Exchange or other) / Bloomberg pricing  Redomiciliation facilitated

LIGHT TOUCH not SOFT TOUCH

JURISDICTIONAL COMPARISON

Gibraltar - the European Cayman Gibraltar

Cayman Islands

Luxembourg

Legal system

English-based common law

Civil law

Investment restrictions

None

Specialised Investment Funds (SIFs) must comply with risk-spreading requirements

Tax

Tax neutral

Annual subscription tax (taxe dâ&#x20AC;&#x2122;abonnement) levied on funds

Fund registration

EIF may commence trading as soon as it launches. Notification to regulator within 10 days of launch

Fund registered by submission of relevant documents to regulator

Fund needs to wait until formal approval has been received from the regulator CSSF before launching, usually 12 to 18 weeks

Local depositary? No requirement

No requirement

Yes

EU Passport?

Yes

EIFs & AIFMD

BELOW SCOPE AIFMD  The simple EIF is the basic alternative fund regime in Gibraltar  Can opt in to AIFMD regime in order to obtain passport even if below €100 million

IN-SCOPE AIFMD  Simple EIF (opt-in or in-scope) + AIFMD Regime = Super EIFs  EIF Regime works TOGETHER with the AIFMD Regime

Timeline – AIFM setting up new AIF Gibraltar 20 days

On day 1: • EIF launch • Submit EIF notification form • AIFM submits notification file Week 1

On or before day 20: • AIFM receives FSC notification • AIFM can market EIF under EU passport Week 2

Week 3

Week 4

Week 5

Week 6 ~~~ Week 18

Week 19

Week 20

Week 21

Other EU jurisdictions 6 to 18 weeks

On day 1: • Submission of AIF registration documents

~~~

+ 20 days

After 6 to 18 weeks: • AIF approved and registered • AIFM submits AIFMD notification file

(On or before 20 days later): • AIFM receives regulator notification • AIFM can market AIF under EU passport

Conclusion

 Why EU is important to raising AuM  How EU regulates the marketing of funds  Dangers of reverse solicitation  Difficulties of private placement  Passporting  AIFMD compliant vehicles (EU AIFM)  Build or buy  Aspects of non-EU AIFMs  Not as easy as it seems  Aspects of Small AIFMs  Options available  THEREFORE, if EU then Gibraltar  Closest to what investment community is used to (Cayman)  The safe way to market in the EU MAKE GIBRALTAR YOUR GATEWAY TO EUROPEAN UNION INVESTORS

GSX Visibility and Connectivity

2015

GSX – A Passive Route to Europe  Open-ended Funds (Listing now)  Time & Cost To Market  Visibility  Connectivity – audit trail

 Closed-ended Funds (Listing 2H 15)  Asset Backed Securities (Listing late 15)  Exchange Traded Instruments  Not AIFs  Making a non-UCITS open-ended fund UCITS eligible Gibraltar’s First Exchange 2

Introduction To GSX  GSX is a Gibraltar-based private company, an EU Regulated Exchange licensed by the Financial Services Commission. Commenced its operations on 10 November 2014 as a technical listing exchange for open-ended funds.  Will extend its listing services in 2015 to include: • Closed-ended funds, • Asset-backed securities, • Insurance linked securities, • Debt securities • Derivative securities  Provides a robust listing process that is fast to market and commercially attractive compared to its European peers. This may be a particularly important consideration for small and medium sized funds

An Alternative for Alternatives 3

The Global Drive To Fund Listing Investors Demand

Managers Require

Disclosure

Visibility

Transparency

Accessibility

Reporting

Marketability

Listing Balances The Needs Of Investors And Fund Managers 4

Listing My Fund On GSX?  3 Core Messages:  Time & Cost To Market. Listing is now accessible to small to medium sized managers  Visibility. GSX listing raises profile through EU Fund Distribution network via newsletter  Connectivity. Unique connection mechanism provides audited trail of investor enquiry

Unique EU Offering 5

Time and Cost to Market  Why and How is GSX Faster to Market than other EU Exchanges?  Philosophy of Disclosure, not prescribed rules as to what a Fund may or may not do  Practical: Less modifications to existing documentation  Speed of the Listing Authority

A Practical, Robust Code Not Reliant On Prescribed Rules 6

Time and Cost to Market GSX 4 Stage Listing Process OPEN ENDED FUND

 Appoint a Listing Member Firm. Responsible for preparation of application bringing listing to market. Less than 4 weeks

MEMBER FIRM

 Member Firm submits all documents to GSX who review pack within 5 days of receipt. May seek further clarification. Once satisfied, GSX will forward the completed application to the GSX MLC

GSX GSX MLC LISTING AUTHORITY

LISTING

 The GSX Membership and Listing Committee (MLC) shall review all applications usually within 2 days of receipt after which it will make its recommendation for approval to the Listing Authority (Independent Body manned by FSC);  MLC submit application to the Listing Authority . The Listing Authority has 10 days in which to either approve the application or ask further questions. Answers provided, the Listing Authority has a further 10 days in which to either approve or decline

A 6 to 8 Week Listing Process 7

Visibility & Connectivity

North America Funds

? ?

Asia Funds

Latin America Funds

GSX Will Help Funds To Raise Visibility in EU. How? 8

Visibility LIFE INSURANCE COMPANIES

FUND OF FUNDS

IFAs INVESTMENT BANKS

FAMILY OFFICES

CONSULTANTS

PRIVATE BANKS

HIGH PRIORITY PHASE 2

HEDGE FUND DATABASES

DISTRIBUTION HUBS

GSX building a Market Place via GSX Newsletter 9

Connectivity GSX CONNECT LIST

 Transparency, Visibility, Recognition, Speed to Market, Economic

SOURCE

 Investors can search for Asset Class, Currency, Geography, Manager

PROTECT

 Investors must Login & Register, sign Disclaimer, data stored and audit trail established

CONNECT

 Connecting Investors with Managers directly via email. Managers responsible for subsequent DD

A Connectivity Process Unique to GSX 10

GSX CONNECT

GSX Website Specifically For The Fund Industry 11

Fund Discovery Process

ď&#x192;&#x2DC; Users Access Greater Fund Details, NAV and Performance Managers Can LIST Clear Fund Details 12

Connecting Your Fund

 Users Once Registered Can Contact Managers Directly  Managers Must Conduct Their Own DD Users Can CONNECT Directly With Managers 13

Audit Trail

ď&#x192;&#x2DC; Users Must Agree To Disclaimer, T&C Audit Trail & Disclaimer Process 14

Who Can List on GSX?  Applicants Must Be:  Open-ended Funds  Approved Jurisdictions  Directors & Investment Manager Experience  Applicants Can Be:

 Start-up Funds  Established Funds

Especially Attractive For Small To Medium Sized Funds 15

Closed Ended Funds (late Q3 2015)  Approved Prospectus  EU Regulated exchange demands Prospectus Directive compliant listing particulars for transferrable securities  Philosophy of Disclosure, not prescribed rules as to what a Fund may or may not do above EU regulations  Practical: Less modifications to existing documentation  Speed of the Listing Authority

 Speed to market and cost savings

Unique Offering on an EU Exchange 16

Closed Ended Funds  Visibility  EU Fund Distribution network

 Liquidity  Co-listing on MTF for liquidity and price transparency

An Alternative for Alternatives 17

Securitisation (late Q3 2015) ď&#x192;&#x2DC; Asset Backed Securities or EXCHANGE TRADED INSTRUMENTS (ETIs) ď ą A stock exchange traded security that is backed by an underlying asset or basket of assets and delivers the delta one performance of the underlying

Securitisation CASE STUDY EU PROFESSIONAL INVESTOR ETI Units

Cash MANAGEMENT COMPANY

SECURITIZATION COMPANY

SELF PROMOTE

Fund Units

Cash

HEDGE FUND

ASSET MANAGER

EU LICENSED PROMOTER

Structure Allows For A Number Of Promotion Options 19

ETIs – Features & Benefits  Repackage a Collective Investment Scheme into an EU Transferrable Security  Regulation: ETI’s issued By Securitization SPV fall under ECB Regs  ETIs are not AIFs  Flexible Choice of Asset Class (HF, VC, PE etc)  ETIs have no restriction on asset class securitized  ETI’s Are “Pass Through” Instruments with 1:1 participation  ETIs feeders into underlying assets. No leverage  Passporting & Promotion Rights Throughout EU  ETI securities listed on GSX (ESMA approved EU exchange) issued with approved prospectus automatically eligible asset for UCITS funds. 20

Joanne Beiso Gibraltar Financial Services Commission

Gibraltar Financial Services Commission EU regulator â&#x20AC;˘ Compliant with EU directives

Matching UK standards Satisfactory IMF, FATF and statutory reviews

Marketing ď&#x201A;&#x2014;Passporting ď&#x201A;&#x2014;National Private Placement Regime

Reverse solicitation Unsolicited? Undertake careful due diligence as marketing regimes are not fully harmonised

Passporting  Notification forms providing key details:  Programme of operations  Incorporation documents  Identity of depositary  Information provided to investors  20 days from establishment to passport  As long as FSC is satisfied

EIF - 20 days to market in EU • AIF notified as EIF and passporting documents submitted Day 1

Day 10

Day 20

• EIF registration decision made

• AIFM advised by FSC it can passport

NPPR  Notification or Application  different approaches  Requirements change by EU country  Limitations on how can market  Cannot advertise  2018...