gateway to the european union - hong kong presentation

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 Partner Partner

ISOLAS Grant Thornton Hassans

Freedom of movement of:

1. Persons 2. Goods 3. Services 4. Capital

European Union

Single market with 28 countries

Gibraltar Finance

Centre in EU

EU Statistics

Inhabitants Global Wealth Global

• EU 500 million 7% $17.958 trillion 23.8% • US 320 million 4.5% $16.768 trillion 22.2% • China 1.357 billion 19% $9.240 trillion 12.2% • India 1.252 billion 17.5% $1.875 trillion 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 (“AIFMD”) 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

Risk management

Liquidity management

Organisational requirements (Four-eyes/staff)

Annual audited reports

Reporting obligations to regulator

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

Article 4(1)(x) 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”

Reverse Solicitation

Recital 70 of AIFMD:

“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

Notification

Approval

Approval

Approval

Commence-ment of

marketing

From notification

From notification

From approval

From approval

From approval

Depositary requirement

No

No

No

No

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 Case Study and analysis: requirements and 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 How and when are you captured?

Hong Kong Manager

Marketing AIF in the EU

Private Placement (subject to additional AIFMD requirements

AIFMD – Marketing Passport

+ Private Placement

AIFMD – Marketing Passport

+ Private Placement??

Managing EU AIF

Delegation arrangements (subject to AIFMD requirements)

AIFMD – Management Passport + Delegation arrangements

AIFMD – Management Passport + Delegation arrangements

From 2013

From 2015

From 2018

AIFMD: Establishment, Key themes and business impact

• Externally managed: EUR 125.000 when more than 250 min AUM, 0.02% over this, capped on EUR 10 min

• Cash flow monitoring • Monitoring role and custody • Liability

• Markets and instruments • Illiquid assets, actual risk profile and • risk management tools • Results of stress tests • Leverage • Systemic risk information

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

• Functionally and hierarchically separate

• Due diligence investments • Limits on leverage • Stress tests

• 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

• Guarantees for independent valuation

• Functionally independent from portfolio management

AIFMD: The Build option Hong Kong Manager – Sub or over 100m EUR Gibraltar or European AIF, Gibraltar AIFM

Gibraltar AIFM Hong Kong Delegated Manager

• Understanding key management functions

• Understanding the application procedure and requirements

• Core and Non-Core functions

• Understanding substance requirements

Gibraltar/EU Investment Fund

Delegation under AIFMD Understanding the operation and limitations of delegation

• Understanding delegation under AIFMD

• Objective reasons

• Letter box restrictions

• Effective supervision

Understanding objective reasons for delegation,

AIFMD: The Buy option Hong Kong Manager – Sub or over 100m EUR Gibraltar or European AIF, Gibraltar AIFM

Gibraltar AIFM Provider Hong Kong Delegated Manager

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)

Gibraltar/EU Investment Fund

AIFMD: Establishment, Key themes and business impact

• AIFM

• AIF requirement

• AIFM

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

• AIFM • AFIM

• AIFM

• AIFM

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

• Understand action points and options

• Consider the alternative options. Plan for the long term

• Innovate and collaborate – We are here to help

Presentation 9 July 2015

Adrian Hogg

Partner

Grant Thornton Gibraltar

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Proposals..

Non-EU AIFMs & Small AIFMs (below scope)

©2013 Grant Thornton International Ltd. All rights reserved

Non-EU AIFMs

Active

EU Marketing Passport

NPPRs (private placement) Passive

Reverse Solicitation

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EU Marketing Options

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2013 - 2015

2015 - 2018

2018 onwards

• Private placement

• EU marketing passport • Private placement

• EU marketing passport • Private placement ??



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Regulatory

Depositary Capital requirements Remuneration Risk management Liquidity management Valuation Reporting

Member State of Reference

Will be determined by: • where most AIFs

established • where AIFM intends to

develop most effective marketing

Member States jointly decide

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

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.

Loss of Control

Increased Cost

Increased Regulation


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Non-EU AIFM

EU AIFM

CONTROL:

• Regulation • Cost • Member state of reference

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

(loss of control)


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Marketing via NPPRs (private placement)

Marketing via Article 42

Three principal requirements

a) Comply with Articles 22, 23, 24 and 26 to 30

b) Appropriate co-operation agreements in place between EU and non-EU competent authorities

c) Non-EU AIFM and non-EU AIF (as applicable) is not a non-cooperative country

Articles 22, 23 and 24

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

authorities)

Articles 26 to 30

• Obligations for AIFMs that acquire non-listed companies


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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

UK

Germany

Marketing via

Notification

Approval

Commence-ment of

marketing

From notification

From approval

Depositary requirement

No

Yes


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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


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Small AIFM (below scope)

AIFMs who manage AIFS of less than €100 million

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

Open-ended

Closed-ended

If exempt only

Articles 3(3), 3(4)

and 46 apply

Article 3


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Light Regulation

Regulatory

Article 3(3), 3(4) and 46

Marketing

Via NPPRs (private placement)

Cost

Limited regulatory impact

Ability to Market

Low Cost


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FUND TYPE

EU

Non-EU

Cayman Islands Fund

Hong Kong Fund

BVI Fund

Irish Fund

Gibraltar Fund

Luxembourg Fund


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Gibraltar Fund

• EU compliant

• OECD compliant

• Can opt-in to AIFMD

• Some NPPR advantages (Germany)

• Segregate EU regulation within an EU fund

EU Special Features


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Gibraltar Fund

• Private equity • Real estate

Parallel Fund

Feeder Fund

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

Segregate EU regulation within

an EU fund

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

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.

Your Fund PCC Limited

Cell A European Equities

Cell B Global Fixed Income

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 English-based common law Civil law

Investment restrictions

None None Specialised Investment Funds (SIFs) must comply with risk-spreading requirements

Tax Tax neutral Tax neutral Annual subscription tax (taxe d’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 No 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

Other EU jurisdictions

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 ~~~ Week 18 Week 19 Week 20 Week 21

~~~

On or before day 20:

• AIFM receives

FSC notification

• AIFM can market

EIF under EU

passport

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

On day 1:

•EIF launch

•Submit EIF

notification form

•AIFM submits

notification file

On day 1:

•Submission of

AIF registration

documents

20 days

6 to 18 weeks + 20 days ~~~

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

1

2015

2

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

3

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

4

The Global Drive To Fund Listing

Listing Balances The Needs Of Investors And Fund Managers

Investors Demand

Managers Require

Marketability

Accessibility

Visibility

Reporting

Transparency

Disclosure

5

Listing My Fund On GSX?

Unique EU Offering

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

6

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

7

A 6 to 8 Week Listing Process

MEMBER FIRM

GSX MLC

LISTING

OPEN ENDED FUND

LISTING AUTHORITY

GSX

Appoint a Listing Member Firm. Responsible for preparation of

application bringing listing to market. Less than 4 weeks 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

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

Time and Cost to Market GSX 4 Stage Listing Process

8

Visibility & Connectivity

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

North America Funds

Latin America Funds

Asia Funds

? ?

?

9

Visibility

GSX building a Market Place via GSX Newsletter

FUND OF FUNDS

PRIVATE BANKS

IFAs

LIFE INSURANCE COMPANIES

FAMILY OFFICES

INVESTMENT BANKS

HEDGE FUND DATABASES

CONSULTANTS HIGH PRIORITY

PHASE 2

DISTRIBUTION HUBS

10

Connectivity GSX CONNECT

A Connectivity Process Unique to GSX

SOURCE

CONNECT

LIST

PROTECT

Transparency, Visibility, Recognition, Speed to Market,

Economic Investors can search for Asset Class, Currency, Geography,

Manager Investors must Login & Register, sign Disclaimer, data stored

and audit trail established Connecting Investors with Managers directly via email.

Managers responsible for subsequent DD

11

GSX CONNECT

GSX Website Specifically For The Fund Industry

12

Fund Discovery Process

Managers Can LIST Clear Fund Details

Users Access Greater Fund Details, NAV and Performance

13

Connecting Your Fund

Users Can CONNECT Directly With Managers

Users Once Registered Can Contact Managers Directly Managers Must Conduct Their Own DD

14

Audit Trail

Audit Trail & Disclaimer Process

Users Must Agree To Disclaimer, T&C

15

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

16

Closed Ended Funds (late Q3 2015)

Unique Offering on an EU Exchange

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

17

Closed Ended Funds

An Alternative for Alternatives

Visibility EU Fund Distribution network

Liquidity Co-listing on MTF for liquidity and price transparency

18

Securitisation (late Q3 2015)

Asset Backed Securities or EXCHANGE TRADED INSTRUMENTS (ETIs) 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

19

Securitisation CASE STUDY

Cash

Cash

ETI Units

SECURITIZATION COMPANY

HEDGE FUND

ASSET MANAGER

EU PROFESSIONAL INVESTOR

MANAGEMENT COMPANY

Fund Units

Structure Allows For A Number Of Promotion Options

SELF PROMOTE

EU LICENSED

PROMOTER

20

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.

Joanne Beiso

Gibraltar Financial Services Commission

Gibraltar Financial Services Commission

EU regulator

• Compliant with EU directives

Matching UK standards

Satisfactory IMF, FATF and statutory reviews

Marketing

Passporting

National Private Placement Regime

Reverse solicitation

Unsolicited?


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

Day 1

• AIF notified as EIF and passporting documents submitted

Day 10 • EIF registration decision made

Day 20 • 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...

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