The Opalesque Roundtable Series ’14 – France

Excerpts from the Opalesque 2014 France roundtable

OPALESQUE

France is the second-largest savings market in the world, right after the US. A real strength of the French market is the diversity of the industry and the number of entrepreneurial asset managers. Of the approximately 600 asset managers in France, two-thirds are small and medium-sized, and some 30 asset managers are created and authorized each year.

As a result of the AIFMD, most of the service providers have increased prices. Some smaller firms have decided to change service providers in order to react and cut costs. While European fund managers certainly appreciate the benefits of their European passport for cross-border marketing, tax issues remain as their most prominent concern, and probably the last hurdle to distribution in countries like the UK and Germany. Nevertheless, over time AIFs could potentially become as popular as UCITS both inside and outside of Europe.

Investors should be aware that European hedge fund managers don’t only launch UCITS or Alternative Investment Funds (AIFs); according to ERAAM, European single hedge fund managers also launched 83 Cayman funds in 2013. However, 89% of the AUM was within nine funds – certainly a very high concentration.

New investor groups like US-based pension funds and others have started to discover European opportunities, offered by European managers, in sectors as diverse as:

  • European equities;
  • European corporate credit and loans;
  • New fields like financial credit or in the management of liquidity buffers (HQLA);
  • Smart Beta 2.0;
  • Securitization;
  • European distressed; and
  • Investments with longer durations, like real estate, infrastructure, and infrastructure debt.

The Opalesque 2014 France Roundtable discusses those opportunities in depth. The participants also discussed:

  • What are the two opportunities European incubators see coming out of regulations?
  • Why do European incubators love Asian managers?
  • Who is driving the strong momentum of UCITS funds?
  • What is the opportunity in long-term and SME financing?
  • How the European Market Infrastructure Regulation (EMIR) can lead to less risk and reduced costs.
  • What is the road to success for an emerging manager? Which mistakes can be avoided?

The Roundtable was sponsored by Lyxor and Eurex and took place on 3 June 2014 at the Paris office of Lyxor.

At the roundtable were:

  1. Natasha Cazenave, Head of the Asset Management Regulation Division, AMF
  2. Denis Beaudoin, CEO, Finaltis
  3. Olivier Kintgen, CIO, Eraam
  4. Antoine Rolland, CEO, New Alpha Asset Management
  5. Fabrice Dumonteil, CEO, Eiffel Investment Group
  6. Paul Beck, Executive Director, Eurex/Deutsche Boerse Group
  7. Christophe Baurand, Head of Alternative Investments, Lyxor Asset Management
  8. Matthias Knab, Opalesque

We are past the middle of 2014; what developments in our industry do you want to comment on?

Denis Beaudoin: We see a significant, twofold trend here in Europe. The first is around the further growth of UCITS that are getting more traction for liquid assets. As a side note, we at Finaltis are only involved in liquid assets. And, secondly, we have the AIFMD effect, which is starting to snowball in Europe, with many side effects. As of now, we are not entirely sure about the magnitude of these effects.

As a result of AIFMD, most of the service providers have decided to increase their prices. We at Finaltis have in fact decided, as a response to that, to launch an RFP covering all of our funds which has led to a change of all our service providers and a lower global cost. That is, of course, extremely time-consuming for us. So, side effect number one is that we are changing all our service providers across the board.

Effect number two is that we are thinking about optimizing our product range. Because of the price pressures, some smaller products can no longer be accommodated by service providers. Even the Fonds Commun de Placement, the French FCP investment structure which is extremely cheap to run, cannot be accommodated any more under all circumstances. This is kind of puzzling, because on the surface AIFMD has nothing to do with French UCITS, for example, but some things are also snowballing on the UCITS side when some service providers take this opportunity to increase all of their fee schedules.

Changing service providers is extremely time-consuming, and we have to work harder to retain our client focus given this concentrated activity on the operational side. This is certainly a threat, because when you lose your client focus, you may lose some customers as well.

Another side effect we are concerned about is the US retro effect. It is very likely that some US investors will decide to remove their investments from AIFMD-compliant funds on the assumption – or actually by now on the clear fact – that the costs of running those funds will increase. These investors don’t see any reason why they should pay for those changes and cost increases when they were not requesting them in the first place. As a result of that we have to carefully craft a new way to attract US investors, because the US investors still are the major pool of demand for us and our specialized products, and so far I don’t see that European investors will step in and compensate for any potential loss of interest from US investors in the foreseeable future. Therefore, finding attractive and convincing proposals for US investors is a survival issue for us.

Christophe Baurand: Denis’s point is right. The smaller firms will be hit particularly hard by this fee increase from service providers. Asset managers are all the more pressured as their own fees have been challenged by investors for some time. The massive change in regulation brought about by AIFMD is accompanied by a complete reshuffling in the nature of the services provided to the fund industry. In the reporting or custody side for instance, it is true that service providers are adapting their prices accordingly. However, they remain constrained too, because the industry doesn’t grow and competition remains high between them.

There is a kind of reality check in terms of prices, whereby size matters. On the one hand,
small funds find it much harder to cope with this type of evolution, because the prices they pay to their service providers are increasing. On the other hand, the larger asset managers are able to renegotiate prices with their service providers to the downside, in spite of the additional workload for them. This is what we have experienced at Lyxor.

Natasha Cazenave: Let me add a few elements from the regulator’s perspective. I agree that the AIFMD is a very structuring directive. It does reshuffle the cards in the asset management industry, but we have a different take about what’s going on, as from our perspective we are looking at a broad number of aspects.

The first aspect is that in France many firms were already largely compliant with a number of the AIFMD requirements, so for them the step was not that high. Of course, some requirements, like the reporting to regulators, are new, but to a large extent many rules were already in place in the industry, and part of the French regulation or industry practices have even inspired the AIFMD, e.g., the depositary requirements.

Another aspect worth mentioning is that, when it comes to the discussion around size, it is interesting to notice that in fact quite a few small entities have asked to opt in for the Directive, particularly from the private equity space. They are not required to do so, but they ask to opt in, and that is an indication for us that they see more opportunities than challenges with the entry into force of this Directive.

I also understand that investors outside of Europe possibly don’t have the same understanding of the Directive, looking at it from outside our borders, but some of that may be part of an educational process as well. We consider it one of our key priorities to work with the asset managers, to accompany them through this change, understanding their concerns and providing guidance to them.

Antoine Rolland: Every new regulation, when it arrives, is typically very complex to understand; even we professionals around this table don’t understand all aspects of AIMFD’s application, but at the end I believe it’s a good thing for asset managers to be able to market all around Europe with this passport. When it comes to my area, the field of incubating funds, we see two main opportunities coming out of regulations at the moment. One relates to foreign, non-EU-based managers who want to go with these directives and try to market in Europe through an EU-based incubator like us. That in turn gives us the opportunity to negotiate better terms with US or Asian managers who want to come here and don’t know about the rules or don’t have the infrastructure. Through a platform like ours we can seed them and also give them access to Europe that otherwise would be quite difficult for them to get.

The other positive aspect or opportunity we see is that it has become more attractive to take equity parts in asset managers. I believe that this helps to achieve a higher alignment between shareholders of asset managers and the managers themselves, whereas before a lot of money has been taken from the bottom lines of the shareholders. Now there is more alignment, and I think there is more and more value in buying and taking an equity stake in asset management firms. We at NewAlpha will develop this portion of the business before the end of the year by developing pure private equity elements of our seeding business.

Denis Beaudoin: I agree with Antoine that it’s always a good idea to harmonize offers across Europe. AIFMD, of course, targets the asset management companies and the supply side of the business; it is not intended to harmonize the demand across Europe, and on top there is no way we can harmonize the tax side of the business.

It is correct that AIFMD is a framework that lets you market across Europe, but in doing so, we are forgetting two key things. The first thing is that a client has to be in demand of a product. You cannot push a product onto a client when the client doesn’t want to buy it, or even worse, when he is not allowed to buy the product. Even a French AIFMD product will not be bought by a French pension fund, and it is unlikely that it will be bought by a French insurance company, simply because the regulation and/or board of both entities will make it difficult or simply forbid it. You will, of course, find the same restriction when you take the product across borders into say Italy, Germany, or the UK. So you are facing problems on the demand side, on the regulation of the demand all across Europe.

And the second aspect is taxation. Europe has harmonized products, services, and makes sure there is a free market, but there is one thing which is retained by each state – its tax policy; and being French we know what it means. The tax issue also affects your distribution. Just try to take your product to Germany: you will have to pay a huge entry fee to local service providers that help you turn your accounting into German tax-compliant accounting that will cost you north of €15,000 per fund. So the local service provider will then ensure that vis-à-vis tax authorities in Germany you will be deemed liable for those taxes to the German authorities. And this happens across most of Europe in various shapes and schemes.

So when it comes to our business, which is basically selling funds, we are facing a huge challenge because buying funds has become such a problem for many clients. As a result, most of our European investors are unable or unauthorized to buy funds, be they AIFMD-compliant or not. UCITS, by the way, did not change a thing either as far as regulation of demand and taxation are concerned, with the exception of nimble service providers having refined multi-country taxation and operational toolkits, making it possible to efficiently distribute across borders (for a handsome fee, though).

Christophe Baurand: I completely agree that the tax issue is certainly the most prominent and probably the last hurdle to distribution in the European market nowadays. But I disagree that we have a tax issue in all countries across Europe. It’s very limited to a number of states, including the UK and Germany. For instance, the new AIFMD tax regime in Germany is creating major challenges for hedge fund investing.

On the other hand, the emergence of a level playing field in Europe in terms of regulation for funds that don’t fall in the UCITS category definitely gives easier and safer access to institutions investing in complex strategies. We get this feedback from institutions across several countries including Italy or Germany. Many who were not comfortable investing previously in offshore funds are now considering investment in AIFs. We are just at the beginning, but AIFMD could potentially become as popular as UCITS if it works out well, including outside of Europe.

AIFMD certainly causes trouble for small firms, because it’s a lot of work and higher cost. At the same time, from a marketing standpoint, it opens doors to a harmonized market in Europe, while to some extent restricting foreign providers to sell their products as easily as before. This creates a void which can be opportunistically used by European providers. It won’t last but, for now, it is favourable to European players.

Fabrice Dumonteil: In the five years we have been around at Eiffel, we have seen regulation increase drastically. Actually we rather like that and believe that it gives us a competitive edge. Indeed, European corporate credit, the market on which we focus the most, is big (1000 situations and circa €2 trillion of cash instruments) and growing, but it’s not huge yet, and so we like the fact that, at least for the time being, European regulations tend to restrict the competition from this opportunity. For example, a US-based credit manager may decide that it’s too onerous to comply with European regulations and therefore not fight to come invest in and market in Europe – they will leave that to us.

Olivier Kintgen: Though I am not a great expert on regulation, I just gathered some information before I came here from my COO, and one thing he pointed to was the difference between France and Luxembourg, where it seems you need a lawyer because the manager cannot speak to the regulator directly. That means he loses a lot of time, and it costs extra money. It also seems it takes four to six months to get the AIFM approval, so there is a big queue of funds waiting for AIFMD in Luxembourg.

And the market for our funds is not France; it’s much bigger in Luxembourg, especially in the alternative space where we are active. So our firm invests in SIF and UCITS, and we still invest a lot in Cayman. That is also because our client base is very much US-driven. They don’t want to hear about anything else than Cayman still today. I also invest in new Delaware-based partnerships, and I don’t see a trend that this will be changing.

In a way this focus on the offshore world from the client side is beneficial for us, because we are able to deliver them products in the format they prefer. I also see that there is not a lot of expansion on the side of the European-based managers that we work with. Our firm has been around now for 15 years, so there are a number of managers we know very well, but not many of them raise assets in the Cayman format. Actually, I think we had 83 launches of Cayman funds last year from European managers, and 89% of the AUM was within nine funds. We are dealing with a very high concentration, and you have to be very selective, but again, if you want to deal with the US, you have to have a Cayman structure.

Paul Beck: Not only the fund management industry has had to go through a lot of regulatory change – also the banks and the exchanges. The European Market Infrastructure Regulation (EMIR) imposes the clearing of OTC derivatives via central counterparties. That is an opportunity for us as an exchange, but it also requires a lot of investments in terms of infrastructure, know-how, risk management, etc.

There is also a concern from institutional investors about the effects of regulation on liquidity, given that the banks are required to reduce some of their proprietary trading activity. We have had recent announcements from Barclays, Royal Bank of Scotland, UBS and Credit Suisse that are pulling out at least partially from fixed income. The question is, who is going to step in when they are no longer active?

Looking ahead, where can you see growth and opportunities for your companies and your products?

Denis Beaudoin: We see two areas of opportunities for us. One is through our quantitative investment strategies that we run on the asset management side of our business. In this context, we see a strong trend coming from the US and the north of Europe which is called Smart Beta. We have launched a product in that field that we believe to be Smart Beta 2.0, but we will know when we have investors for real, as marketing is only getting started. The second dimension where we see growth for us is by our geographic focus on Northern America. I would say that at least 80% of our growth is currently generated from there.

Natasha Cazenave: As the regulator, we also have an overview of new authorized products and new company authorizations. One sector where we have seen some activity is in loan funds, funds investing in loans, which is of course the result of the banks moving away from credit. We see the development of more market-based financing as positive for the overall market.

The other sector I would like to mention is securitization. We have been very active in the various national and international efforts to try and promote a sound environment for securitization. This sector has suffered a lot from the crisis, and there have been many international efforts to re-launch this segment in a more sustainable form. Loan funds and securitization are probably two areas that may provide new opportunities for asset managers.

Finally, I agree with the previous comments that the regulatory framework has been evolving rapidly with numerous initiatives coming one after the other, all with different angles and different objectives. For example, the AIFMD focuses on regulation and supervision of asset managers, while the recent initiative published by the European Commission on long-term investment is focused on creating a new investment vehicle to promote sustainable growth and channel savings towards long-term infrastructure projects. We are also looking at money market funds from a systemic risk perspective with a view to reinforce their resilience to runs.

We understand that all these developments can seem overwhelming, and that it may also seem difficult for the market players to understand where the opportunities are and what they should be doing. However, from our perspective we do see a number of players that view the current environment and the new regulations as creating new opportunities.

Olivier Kintgen: I am glad to hear what you are saying. Also from our perspective as a manager selector, we see opportunities for investors and also further growth in the lending space. We are also very interested in securitization. Securitization was a very commonly used tool, especially in the French market, and it was totally abandoned after the crisis – everything went into liquidation. There were huge opportunities to buy those assets in distress, and we have been doing that since 2010, unfortunately more with London than Paris-based managers. Although the skill set was also in Paris, we saw a lot of companies emerging in London or elsewhere doing those kind of trades. It could be that it was not that easy for a manager here to set up and raise money for such securitization trades.

We also see growth coming from new investor groups that are interested in our markets. For example, we are now having discussions with people we didn’t talk to before, like pension funds in Switzerland and many from the US, and I agree with our previous observation that people from outside the EU have a lot of questions about the European regulation, the European banking system, the EU’s political organs like the Commission, and so on.

In fact, Europe can be a struggle even for us being based here, so there is a clear need for people like us to translate and explain things to people outside of Europe. I have been travelling to the US twice a year forthe last five years, and I remember in the early days the discussion was a lot about the euro, and now the discussion is becoming also more in-depth as, for example, US managers are looking to invest in Europe and intent on taking a share of the market.

Large multi-billion US businesses may also look at European distressed opportunities, and a typical pitch may be, “I got the money, so I will go to Spain and talk to SAREB and buy all the real estate; I will go to German banks and I will refinance”, and so on. However, I think these opportunity sets are much more complex, much more fragmented; there is a lot happening in smaller size and bespoke. Sure, there is a clear understanding of the investor that this is an attractive opportunity set, but many don’t know how to structure it. So they are thinking about it, and maybe we should think about an available tool or vehicle that can be offered to investors as access to certain European situations.

But, when you talk to the French investor base, they have billions invested in bonds and they don’t want to use their liquidity, their long-term liability, for such opportunities, because they have a regulator on their back saying, “How much time would you take to liquidate that?” So it has destroyed totally the natural buyer market that we used to have before the crisis. However, now some of them want to come back in order to participate in the funding of the real economy, but unfortunately the market is offering less opportunity now. The investors are starting to look at their options, but they don’t have many.

Fabrice Dumonteil: Building on what Olivier just said, we clearly see many very exciting opportunities in corporate credit in Europe at the moment as a result of the disintermediation of the credit markets which is happening, however, at a very slow pace. At the moment about 70% of the credit to the economy is done via banks, versus maybe 80% a few years ago, compared to 30% in the US. That shows we have still a very long way to go, and this provides both vanilla opportunities and more complex opportunities.

Vanilla opportunities include the increasing number of new companies coming to the high-yield market for “strategic issuances” at attractive yields. We had a record year in European high-yield issuance last year, and while it is still only a fraction of what is done in the US, it shows a healthy growth. Many of these new companies are under-researched, and that is where we can make a difference with our own research capability and being based at the centre of Europe.

There are also very interesting opportunities in the space that is left between the liquid investment-grade and high-yield credit and the jumbo illiquid credit trades that the big private equity or distressed managers fight for with their billions. These “below-radar opportunities” have either a complexity or an illiquidity premium or both – for example, discounted corporate loans, off-the-run CDS, complex corporate structures, etc. To source these credits, you really need to be local and on the ground to understand what’s going on. This is our bread and butter.

Apart from those great opportunities in corporate credit, we also see a major opportunity set in financial credit, i.e., credit of financial institutions. This market is dealing with the transition from Basel II to Basel III where banks have to basically retire €600 or €700 billion of old hybrid capital instruments and replace them with the same amount of new hybrid capital that can count as capital under Basel III. That’s the CoCos or alternative tier 1. So this segment of European credit also provides very exciting opportunities for us at the moment.

Christophe Baurand: I would like to disagree to a certain extent. First of all, at Lyxor, we haven’t really seen much interest in credit strategies recently. What we have noticed, however, since the beginning of the year, is a large renewed appetite for equity-related products.
There is strong momentum on the UCITS side. This demand for UCITS funds versus traditional offshore, non-regulated vehicles comes in part from private banks and wealth managers, which have been absent from the market for some years. Distributors are now actively looking for new products. They have been selling equity hedge products in the last months, such as merger arbitrage and long/short equity. Now they are looking for global macro strategies.

At Lyxor we have clearly seen a shift in dynamics in the market, with a larger presence of private banks compared to the previous years. Our UCITS and managed account platform has recorded more than a billion euros of net inflows this year, with a large proportion of private banking and wealth management clients.

Besides, there are also a number of interesting developments on the long-only side. The loans market in particular is growing in Europe as a consequence of the regulatory changes and the efforts deployed by banks to distribute the loans they traditionally kept on their balance sheets. Funds of loans are flourishing, fuelled by the demand from insurance companies.

One last interesting trend I wanted to mention is for the asset management industry in general and about a new development on the side of banks: the management of liquidity buffers (HQLA). Most of them are in the ramp-up phase of building pools of liquid assets to reach the 60% level set by the Basel III committee for January 2015. These large pools of assets invested mostly in government and sovereign issuers’ bonds will have to be managed carefully to maximize yields while taking into account the constraints of banks and their regulations, such as capital preservation, OCI volatility reduction, or RWA minimization. This new multi-billion market will provide interesting mandates to asset managers capable of understanding the specificities of the banking environment.

Antoine Rolland: We talked a bit about opportunities coming from the US or here in Europe, but we also see all sorts of opportunities in Asia, also in terms of the quality of manager we meet there. That is a development which will continue for the next 10 years and offering a lot of opportunities for incubators, finding the future big players based in Asia who manage money locally.

When it comes to new product launches, I would like to point to the big dislocation we have in our industry, with the concentration of assets in the hands of only a few very large players. That makes it still very difficult for small companies to raise assets. This in turn will sustain the opportunities we have now in the incubation business – it’s a good space to be because this environment helps you negotiate with managers who are struggling to grow and therefore intent on finding intelligent partners who help them develop their business.

I also see that funds of funds dedicated to emerging or smaller managers are receiving more interest now. The dislocation caused by the concentration of assets with the very large players also means that there is a lot of talent that many investors are ignoring, but not all of them. In the US we could observe that more people have become active in trying to find talent among the smaller firms, so eventually also this segment will be growing.

When it comes to strategy outlooks, there may still be opportunities on the credit market, but if you look at the combination of a lack of liquidity in the market right now after five years of equity bull market and the very low VIX level, I also think that a lot of investors are attracted by market-neutral or de-correlation strategies right now. Investors are starting to become a little bit afraid about what could be the next moves in the markets, so they come to us and express their need for market-neutral and uncorrelated strategies.

A number of initiatives, both at national and European level, aim at promoting long-term financing and SME financing in various ways. It would be interesting to hear your views, whether you think that this is a real opportunity for asset managers, whether there is demand in these segments, if you believe the proposals put forward could work?

Olivier Kintgen: I think there is definitely a gap to fill. When you look at a longer-term financing of, say, five to seven years, that has traditionally been the domain of the private equity guys because they have these relationships with investors to manage and keep their money for seven to 10 years. However, we think that to address this gap, we don’t need to have a seven to 10-year lock-up. I agree with Fabrice that there is a sweet spot in the shorter duration of, say, three to five years, which in my view is a great area of market today.

When I talked to investors three years ago, everybody wanted liquidity and the option to get to their money the next day, and that of course means UCITS. Now, three years later, investors see that UCITS wasn’t necessarily a success in terms of performance. We discussed a lot about regulations today, but at the end for investors the bottom line is quite important. Investments need to perform. In that respect, I think there is a tremendous gap between the liquid alpha and the alpha you can get on the more illiquid side. That gap is astounding, and it offers investors a broad range of different kinds of risk.

However, all of us went through 2008, which means we have to be very cautious and also think of certain lock-up vehicles, because none of us wants to be a forced seller again.

We would like to have the ECB bridging the gap, but realistically it is about recreating a chain of confidence in lending. Interestingly enough, the American asset managers can be convinced, because they went through this in their own country, so they understand the philosophy of what we are trying to achieve. The problem is that because they are so far away, they aren’t comfortable with how Europe looks from overseas. Hence they rather invest with a US-based manager. However, I think the know-how is within the European-based manager with an origination background or a very strong fundamental analysis engine. It is probably one great opportunity for funds of funds to set a proper diversification within some managers, and because we do emerging managers historically we have a very smart proposition to show in that space, and it will be an emerging manager story, I think.

Our country has amassed huge savings, but these savings don’t want to catch the illiquidity premium – unfortunately people are totally stressed with that…

Antoine Rolland: On the other side, we have noted that French institutions are expressing now appetite for real estate, infrastructure and infrastructure debt. These investments have started to grow in 2013 and also this year. So people are going for a higher duration of seven to 10 years, and this will continue to grow very fast until inflation comes back, but nobody knows when that will be.

Christophe Baurand: Many countries in Europe, and particularly France, don’t have a deep-rooted equity culture. It evolved over time, but we remain far behind the Anglo-Saxon world. On the loan side, I think things have changed rapidly in Europe. Disintermediation has started as a response to the crisis and the regulatory changes. This has translated into the emergence of funds of loans, as well as direct placement of loans to institutional clients looking for yield, like the large insurance groups through their asset management arms.

This phenomenon has gained momentum, but it is a long-term process. Europe still lags behind the US where the economy has started this process in the ‘70s. In Europe, we are in a transition phase where the disintermediation process is slowed down by a few short-term factors.

On the one hand, the banking industry is better off than a few years ago. Banks have refinanced and started to reduce their leverage. Their appetite to distribute the loans they originate is now lesser than two years ago. They are more inclined to keep them in order to maintain stable revenue streams from their credit books.

On the other hand, the short-term demand from the market has been partly met. Insurance companies and pension funds have started to invest a fraction of their assets. But European loans remain relatively illiquid, which limits the size of the market. Eventually, we are looking at a sustained long-term development, comparable to the US. Banking disintermediation and deleveraging in Europe will continue, bringing interesting opportunities for investors with appetite for stable returns.

Olivier Kintgen: I still think that the main issue that is still not addressed or solved is the need for the right vehicles to provide such mid-term financing. When smaller players like us or Denis are trying to create value for clients in the loan and the credit space, that value is not in a large, massive distribution. What we’ll be doing is a rather small investment in which you don’t want to be liquid, otherwise it’s going to be a disaster. So if you want to match three or four-year SME loans, you do it with a three to five-year product, and we still need the framework for this.

The irony is that the insurance companies could do such investments; they have super long-term visibility on their liabilities, but they don’t use it to invest that way.

Natasha Cazenave: Correct me if I’m wrong, but I think we do have a framework for financing the economy in France, and I’m surprised to hear you say that you don’t have the right product range or vehicles for that. We probably have the largest range of fund products available of anywhere else in the world.

The AMF has been very much involved in a number of initiatives aiming at channelling funds towards SMEs (e.g., the creation of Enternext, the PEA-PME, Nova, Novo, etc.). Making finance meaningful again is at the core of the AMF’s strategic plan. We will continue to work to ensure that funds are directed to the right companies where the needs are, but maybe I misunderstood the comments made on this point.

Quite a few of you are involved with emerging managers; even Lyxor has started to actually seed managers. I was wondering, from your perspective as seeders, incubators, first or early-stage investors, how does the road to success look like today for an emerging manager?

Olivier Kintgen: We have been doing emerging manager for the last 15 years. More than 52% of our investment over those 15 years has been with managers with less than a one-year track record, so I think we know a little bit how it works. If you study our industry, you will agree there is a before-2008 and after-2008. To target multiple jurisdictions, developing different target customer bases has become a huge challenge for managers today.

If you start up with a Cayman fund and try to make it UCITS, then you spoil your Cayman investors because you make it more liquid, but maybe not cheaper. So you may have to rearrange your fees – these things are complex. Managers today face a challenge due to the multiplicity of potential vehicles that can actually cannibalize each other. That is the first challenge – if you are an emerging manager you need to decide who will be your target customer. And that’s where you start from today.

Other considerations are related to the liquidity profile of the strategy and barriers to entry. Funds in markets that have barriers to entry, like credit, convertible, or the event space, may be faced with a break-even of at least $100 million in assets today, if not more. To reach such an asset size is the main hurdle. Before it was easy to start smalland grow, but today that is much more difficult.

Antoine Rolland: We all know it has become very challenging for emerging managers. When you analyze an emerging manager, you will be looking at his ability to make money. I believe some recent developments have made that easier for managers. Today, access to information has become easier. The service provider universe has been commoditized to a certain extent, so setting up a company now in a way is easier than before, and managers can access a broad range of products now that they weren’t able before. I agree with Olivier that setting up in certain strategies is more complex and that you need to deliver and to outperform your peers, but I don’t think there are such high barriers to entry in general.

The difficult part for a manager really starts on the development side. It does take years to raise assets, and it has become much more difficult than before the crisis. Therefore, what you need is time, and unfortunately many people forget that time is money. That makes it very challenging for a young company, because when they make a business plan they tend to say things like, “well, next year we are going to raise 200 million”, and then it’s not that next year but maybe two or three years later. That means if you start in this business and you don’t have cash to make the business sustainable for at least three or four years, then forget it, you won’t succeed.

Today, managers all face the same challenges regarding marketing and development. People say they will raise assets because they make money, i.e., because their fund performs, but this is not true. Success in marketing a fund is not linked to the performance, but to investor appetite, to the way you can market the fund, and to how much time you can spend to raise assets. So again, time is money.

From our side as incubators, we believe that the corporate side of the manager’s business is also extremely important: how the company is structured, everything around the shareholders, the alignment of interests, the incentives, how people are remunerated, all those things will be extremely relevant from the first day you are starting your firm.

Lastly let me also add that we see lots of people making mistakes in terms of their adaptation or options regarding regulations. Sometimes managers don’t spend enough time to choose the right product or the right angle to attack their market. For example, we have seen lots of people who have decided to create a highly volatile offshore product and later they realize that the same strategy run under the UCITS framework yields a target return between four to six at a lower volatility, and they could raise a billion with that as opposed to trying to raise 100 million with an offshore product.

Fabrice, please tell us what was your experience setting up? What helped you succeed?

Fabrice Dumonteil: I’m not sure we have succeeded yet but let’s say we are on the way to success. Performance remains the key driver: you need to perform consistently; you need to deliver what you promised to your investors. I agree with Antoine that there are other vital aspects you need to take care of, like having a very robust corporate set-up. Before 2007 you could start in this industry in the proverbial “two guys with a Bloomberg” format, if you had a good pedigree from a large investment bank, and raise a lot of money. Now, you have to think about asset management as an industry like any other, so you have to build a company with processes, management and rules that help you support your growth.

The second aspect is having enough capital when starting out, as Antoine said, because you don’t know how long it will take you to grow even if you run very good strategies and are able to deliver very good performance. We all know that raising assets is not a straight line; it goes by cycles. Youhave to have many starter lines to succeed. You need capital to be able to basically hold on for a while until you start having success.

You should also take great care to develop a strong network of partners to help you – people who help you build your reputation, who are able to help you distribute and raise capital. We have done that with the support of the French seeding initiative Emergence and other very close investors. We have also built a partnership with Blackstone’s fundraising division, Park Hill; this is especially key in the US, which is a geography where we do not have natural presence and reputation.

And finally, you need a great team of people who are the best in their fields and who are also able to work efficiently as a team. At Eiffel Investment Group, principals each have 20-plus years of track record, and we have worked together successfully since the creation of the firm. And we also have a great group of more junior team members with two to 10 years of experience. So our business is clearly not a “one-man show”.

Paul Beck: I would add that it’s also important to differentiate yourself. Fabrice, for example, is specialized on European credit. There are not that many players in that field. If you have already 100 funds or more that focus on long/short or global macro, I think it’s difficult to come up with the $50-100 million to start a new fund and compete with them.

One participant from last year’s Roundtable, Melanion Capital, is a good example of a fund with a differentiated strategy. They focus on one asset class only, dividend derivatives. They launched last year and have already reached €100 million, so it is important that you find your niche and have a unique selling point.

Christophe Baurand: In the last 20 years or so the environment was favourable for asset management businesses in a context of overall bullish markets. Now the industry faces more complex challenges. Competition is fierce, so people reinforce their approach to products, services, marketing, communication and sales, which have not always been at the centre of their reflection in the past. Performance remains a strong driver for the business, but is no longer the sole recipe for success.

More than ever firms need to have a precise understanding of what their clients want. Many are nowadays looking more for dedicated solutions rather than commingled products. Infrastructure, processes, predictability, transparency, reporting, simplicity, diversification and innovation are key features that more than ever complement the performance angle.

This evolution makes it more difficult for emerging managers to get institutional money by themselves. The role of companies like NewAlpha or Lyxor becomes even more crucial in this context. They bring a framework in which institutions can invest, which includes not only manager selection and monitoring, but also a robust operational framework, enhanced reporting and risk control.

Natasha Cazenave: A real strength of the French market is the diversity of the industry and the number of entrepreneurial asset managers. There are approximately 600 asset managers in France of which two-thirds are small and medium-sized. About 30 asset managers are created and authorized each year. This is a major strength of the industry and reflects its dynamism and innovation capacities. Many asset managers here in France are recognized for the quality of their management and expertise, including internationally.

We thank Opalesque for giving us permission to republish extracts from their 2014 France Roundtable.