When the proverbial hit the fan, many US managers packed up their Bloombergs, and retreated back to the US and some simply went to the wall. At a time of shrinking AUM and considerable commercial and regulatory uncertainty, there was little appetite to keep pouring money into an operation in a remote location. It was all about survival. Some, however, stuck it out.
During 2009 and 2010, the number of new start-ups from the US reduced to a trickle. Everyone continued to be cautious. In addition, the spectre of the AIFMD created enough uncertainty that many could not see the merits of making a foray into unchartered waters. The increase in the top tax rate to 50% didn’t exactly help either. At the start of 2011, however, the impact of the AIFMD had been watered down as it became clear that managers could continue to use the private placement regimes. The passporting timeline had been pushed out to such an extent that many thought “let’s make hay whilst the sun shines”.
The sun did indeed start to shine and by early 2011, there was a renewed confidence. Institutional investors and pension funds started coming out of the shadows and were looking to invest in alternatives. With more available capital coupled with the impact of the Volcker Rule, this led to a resurgence in the number of new spin-outs and start-ups, and the return of US managers setting up home in Mayfair or St James’s Square.
The same key factors are driving the renewed interest. Fund-raising is still difficult and access to capital is the life-blood of investment managers. Good communication with existing and potential investors is critical to accessing and maintaining AUM, especially in these times of increased due diligence and a presence in the UK can significantly enhance client relations with European-based investors. Being present in London also gives access to local markets not possible from a different time zone and when a hedge fund manager aligns this with the best talent, it can give it the edge necessary to succeed. The talent pool in London is unparalleled anywhere else in Europe and instability and increased regulation of the banking sector and their employees’ pay continue to favour the hedge manager in the UK recruitment market.
When setting up in the UK, getting the corporate structure right is the first thing managers look at. This needs to provide an efficient framework that fits into the global picture. The structure of choice is normally an LLP with at least one corporate member. However, each situation needs to be looked at on a case by case basis. Next, and depending upon what activities will be carried out in Europe, the manager will look to become FSA-authorised. Whilst there are costs to compliance and the process can take some time, most managers welcome the opportunity to be regulated by the FSA. They see it as a seal of approval. Next, they need to find office space and people.
A lot of managers will look to relocate US talent to the UK to integrate their operations into the global business. This will involve obtaining working permits to ensure that a non-European national can legally live and work in Europe. Depending upon the size of the UK operation, the US expats will be assisted by locally hired personnel necessitating setting up a payroll, providing benefits and ensuring that they are employed in accordance with the law of the land. Unlike the US, where most employment is “at will”, the UK employees have far more protection than their US brethren. The fact that you cannot just fire someone in the UK can come as a shock to some US managers!
The operations of the UK business need to be understood by all parties such that compliance processes can be properly controlled and the flow of revenues can be properly captured and reported. This should be reflected in the investment management agreement or sub-advisory agreement between the US parent (or the fund) and the UK business.
Opening a UK bank account can take a lot longer than most people think. Given that the banks have to deal with their own internal compliance and KYC issues, and that they need to look through to the ultimate controlling party outside of the UK, banks will spend what seems an inordinate amount of time before providing clearing bank facilities in the UK. An existing relationship with a US bank that has UK operations is always a help, but one should start this process immediately after establishing the UK legal entities.
A robust infrastructure is also needed; accounting, VAT, FSA reporting, IT, corporate governance, and taxation, both corporate and personal all need to be considered. Regarding tax, transfer pricing is important for the manager to consider. This will be determined by a review of what functions are performed in what locations. A comprehensive transfer pricing document is key to justifying how revenues are split between the relevant taxing jurisdictions.
VAT is a foreign concept to US managers. Consideration needs to be given as to whether the manager will have to charge VAT on its revenues and whether it will be able to reclaim VAT on its costs. This will depend on the structure of the UK operation, the nature of its revenue streams and the location of its clients. Timing can be important so it is always best to seek a VAT registration as soon as possible in order to avoid VAT costs and maximise cashflows. There are potential changes on the horizon that may affect investment managers with possible impacts to the bottom line so ongoing due diligence will be important.
In order to keep costs down, provide maximum flexibility and ensure all UK matters are dealt with appropriately and on a timely basis, US managers establishing in the UK tend to outsource most of the functions referred to above. They will often employ only relevant front line staff which will reduce the impact of employment issues mentioned above. Since they will often have limited knowledge about running a business in the UK they will look to local professionals to assist them with the process. In most cases, a relationship will be created between the US parent’s COO or CFO and the outsourcing unit so that the front-office the talent are not distracted from their day to day functions.
To conclude, the revival of interest shown by US managers in setting up in the UK suggests that the sector is showing renewed strength and confidence. London continues to be the dominant force in Europe in attracting capital and talent and is the city of choice from a lifestyle perspective. When the City of London is doing well, the rest of the economy also feels the benefit.
Andrew Rubio is an Australian-qualified chartered accountant with 14 years’ experience in investment banking, having worked for Salomon Brothers, Bankers Trust, NatWest Global Financial Markets and Credit Suisse First Boston. Andrew established the accounting function at Throgmorton during 2002. In late 2009, Andrew became CEO of Throgmorton.