Advisory relationships with a majority of Europe’s biggest 50 hedge fund firms by assets under management puts the firm’s London hedge fund practice in a favourable position to provide a broad range of services to start-up and established alternative investment firms. As the London hedge fund sector has expanded over the past two decades Simmons & Simmons has bolstered specialist capabilities in fund law, tax and business planning to keep pace. Now it offers the skills and capacity of a well-developed team to serve the needs of a very broad range of international hedge fund clients.
In late March, Simmons & Simmons advised BlueCrest Capital Management, a long-standing client and Europe’s third biggest hedge fund group with assets under management of $25 billion, on the acquisition by its partners of Man Group’s 25.5% stake for $633 million. It also advised BlueCrest on the simultaneous acquisition of retired co-founder Bill Reeves’ remaining interests in the group.
The Simmons & Simmons team advising BlueCrest was led by corporate partner Colin Leaver, assisted by corporate associates Ania Rontaler, Patrick Boyd and Tom Fricke, banking partner Philip Abbott, assisted by banking associates Ayesha Qureshi, Matthew Dearden and Jessica Foong, tax partner Martin Shah assisted by tax associates Aron Joyand Candice Nichol and capital markets partner Simon Schiff and capital markets associates Nicholas Jones and Alex Fu.
“We are delighted to have advised BlueCrest on this complicated transaction which involved input from many departments within the firm,” says Leaver. “It was a great team effort, requiring in-depth knowledge of BlueCrest’s business and the hedge fund sector generally, acquired through our long-term relationship of advising BlueCrest as well as our large hedge fund client base.”
The practice that Simmons & Simmons has built over nearly two decades of service to hedge funds grew from an early specialism in managed futures under Iain Cullen, partner, who was named Best Lawyer in 2007 by The Hedge Fund Journal. He works with Richard Perry, partner and head of the Simmons & Simmons financial services group, whom Bill McIntosh recently interviewed. The following is an edited account of their conversation.
Q: How did Simmons & Simmons come to develop its hedge fund practice?
A: With Iain Cullen we had strong relationships with managed futures funds. As long/short equity funds developed in the early 1990s client referrals led to our work expanding as more and more hedge fund businesses were established in London. Having a name in managed futures and then clients saying we’d done a good job helped us expand from there.
Q: What did the firm do early on to provide the service that clients required?
A: We had the sort of core skills that were needed: an expert tax team, regulatory expertise and knowledge of structuring funds. The business grew as one client referred another start-up to us because of the quality of the service we provided. Then, as the market grew rapidly, we managed to win and retain a strong market share. For us it’s been about building a team of bright people who care about delivering a quality service by answering clients’ questions and solving their problems. That has been very appealing to clients over time and is the number one reason why we’ve been able to expand the client base.
Q: What other factors made Simmons & Simmons successful in advising hedge funds?
A: In addition to delivering quality client service it’s making sure we’ve had the full range of specialisations. Today we’ve got scale in all of the specialisations. We provide the same quality of high service across the range of fund formation, regulatory, derivatives, M&A transactions, ownership structures, employment and litigation. We have around 80 lawyers in London regularly doing hedge fund-related work and an increasing number across the firm internationally. We’ve got fund formation lawyers in London, Paris and Hong Kong. And we have regulatory specialists on the hedge fund sector across Europe in Germany, France, Netherlands, Italy, Spain and the UK as well as in the Middle East and Hong Kong.
Q: I understand that Simmons & Simmons advised over half of the 10 biggest European launches in 2010. What are some of the key issues that you advise on for these larger scale launches?
A: We acted on six of the 10 largest fund launches in 2010. A key challenge for clients has been getting the right market terms, particularly on fees and liquidity, in what were quite changed market conditions. After the 2008 crisis 2009 was pretty thin for launches, but 2010 saw the launch of a meaningful number of high quality funds. We have continued advising on getting the balance right between attracting day one capital, but not saying ‘yes’ to everything an investor may require in the build up to day one. Everyone’s got to manage their business for the long term and getting the balance right is important.
Another area that has featured is advising on the new model prime brokerage terms that many of the prime brokers have put together and made available to these new funds. There is clearly more regulatory advice these days generally. New funds want to make sure the business that they are creating is aligned to all the new regulatory developments in Europe and the US. There’s also more tax analysis and making sure that uncertain taxes are accounted for appropriately with the change in accounting standards under FIN 48. Managers want to ensure there will be no issues later with potential tax liability so they are paying a lot of attention to the fund’s structuring.
Q: Are these issues much more of an active concern than during the last big boom in launches in 2005-2006?
A: Yes. During the last boom there were fewer significant regulatory developments to consider. In terms of the way our practice looks today there is a good amount of fund formation work but in the absolute peak in 2006 there were more funds being established. Where there has been growth is in the need for regulatory advice. For example, managers are very conscious that the FSA is much hotter on the systems and controls they have in place to avoid market abusive behaviour. Also, with the Alternative Investment Fund Managers Directive coming down the track managers want their businesses established in a way that will make sure that they can be in compliance with the new regime.
Q: Simmons & Simmons advises over 30 of the top 50 European firms. What are some of the key legal concerns for these firms?
A: One issue common to many of these clients is making sure that their location and their remuneration structures attract and retain the key talent. We have found in the preceding 12 months that a couple of the largest jobs we have had involved establishing significant Swiss operations for clients. We have also advised a great deal on remuneration or partnership structures that create incentives for staff to stay over the long term. The managers in that bracket are also finding that investors, who are now content to invest direct in name fund managers rather than invest through funds of funds, are increasingly focused on due diligence issues and are looking for an institutional-style platform.
Part of that platform is a level of infrastructure for legal and compliance functions. There is a lot of interest among these clients in ensuring that the regulatory compliance is of a high order. A new product we have called “Navigator” offers online access to information and advice and has been particularly appealing to the new style of institutional hedge fund manager in Europe, Asia and the US. It is providing information in a user-friendly format on a range of international regulatory issues. The first Navigator product offered advice globally on the rules on marketing funds. A second product targeted the marketing of closed-ended funds and notes. A third product focused on share disclosure and the rules on notifications in equities investment. Navigator covers over 80 countries around the world and is regularly updated and subscriber clients have access to it 24/7. It’s been very popular with the in-house legal teams at leading hedge fund managers and we have applied similar principles in the latest product which relates to the generation of KIID documentation for UCITS.
Q: What impact did the formation of the Financial Services Authority have on hedge fund regulation?
A: Hedge fund managers in the UK have been required to be authorised for a very long time. What changed with the FSA over time during the 2000s was that it made an effort to understand the hedge fund industry. I believe the FSA learnt a lot through that process about the business of being a hedge fund manager and where the regulatory risks arose. It also put particular focus on making sure that managers had systems and controls in place to manage potential market abuse and insider dealing behaviour. That’s probably been the single most significant FSA-led change in approach that we’ve seen together with the enforcement action that the FSA has sought to take in this area. It has made our clients focus on ensuring they have controls and training procedures to make sure that that doesn’t happen.
Q: Regarding AIFMD what are some of the issues that hedge fund managers have most frequently raised?
A: I think the primary issue that we are speaking to clients about has been the matter of depositaries and the interaction of that with the marketing passport and fund domicile. Managers have been interested in the question of where their fund will be domiciled and whether they will get the benefit of the marketing passport when the directive comes into force in 2013. Balanced against this benefit of the passport is the requirement that an EU-domiciled fund will then need to have a depositary in place for the fund.
As things stand at the moment on depositaries, we still don’t know the level of liability, the pricing, or who the players are going to be. The strong impression that we have got from our client base is in general they will wait and see how this plays out before making any commitment to go through the time and expense of a re-domiciling exercise because it could be they are actually in a better place being offshore with no depositary requirements applicable to them. It may still be a year or two before we have a clearer picture of what the depositary requirements under Level II actually look like. Clients know as things stand that it’s going to cost something, but they don’t know how much or how compatible that’s going to be with a multi-prime brokerage model. So for many it’s better to not make a decision and see what things look like in 12 months’ time.
Q: A multi-fund model has developed where asset managers operate many different types of structures and funds onshore and offshore. Do you think that the industry’s development in that direction will eventually displace smaller hedge fund operations that have substantial assets but may only have a couple of funds that are very focused on a specific strategy?
A: I think we will continue to see both. I think there are some managers who will want to keep it simple and focus on non-UCITS hedge fund management. Perhaps they will consider a UCITS version of their strategy, but will choose to avoid diversifying into other areas like private wealth management, retail distribution or private equity. We saw after the financial crisis hit in 2008 many diversified businesses return to their core competency and they’ve become simpler businesses to manage.
The competing trend with some of the larger managers establishing institutional infrastructure is that there is a wider range of products that they can now manage. For some the opportunities will be substantial. They will broaden into other products because they can and investors like what they do. The history of many organisations in the past is that they might have started out managing private client money but became brand name institutional fund managers.
Q: Do you see M&A involving alternative investment firms continuing at the same clip following Man’s buyout of GLG, F&C’s acquisition of Thames River Capital and Henderson buying Gartmore?
A: All of those transactions are quite different. I think we will see some more consolidation because of investor demand for alternative asset managers to have substantial infrastructure, which is quite an expensive thing to run. What we will probably see from some of the mergers that have happened is that there will be significant efficiencies in running those businesses off the same platform.
Q: What’s your view on how the Dodd Frank Act will affect the relationship of US banks with hedge funds?
A: US banks will largely need to reduce their investment in the hedge fund area and there is a lot of activity in proprietary trading teams establishing themselves outside the banks. There is always going to be interest amongst the fund management community in selling stakes of 10-25% in order to monetise part of the business. It is helpful to establish the capital value of a business for the partners and is very helpful for retention of staff, in addition to producing some cash immediately on the sale.
I think managers will always be interested in selling (a stake) because of the requirements for substantial infrastructure. The question now is who will be buying post-Volcker rule if it is not the banks – but I still believe there is money to be made buying these stakes so deal activity will continue.
Q: Where do you think London will be in five to 10 years as a hedge fund centre given that so much is up in the air with the UK business climate as well as tax and regulatory issues?
A: I’m very confident in the hedge fund sector generally as well as London as its centre in Europe. In fact, I’m more confident in the hedge fund sector today than I have been for some time and that’s because we’ve seen it return two good years of performance after the crisis. Investors do seem to be allocating more money to the sector. In terms of London’s position in the market I think that following a period of uncertainty the scope of the directive now appears to be something that the industry will be able to cope with. Levels of taxation in the UK remain a concern in a mobile sector but London will continue to provide managers with hedge fund infrastructure which is hard to replicate in any other European
location.