The Request: Capstone advised a client on the acquisition of an Irish Management Company (ManCo), Governance, and Compliance Services Firm. Our diligence explored the policy-driven opportunities and risks from Brexit, more specifically if the firm was positioned to benefit from the increasing demand for regulatory infrastructure services in continental Europe. We also evaluated the relative perception of the regulatory environment in Ireland versus Luxembourg, assessing how this could impact the choice of ManCo jurisdiction. In Ireland, we examined any pending changes to national legislation and new regulatory initiatives that could impact the Target, including potential for changes to Fund Management Company guidance (CP86), rules governing investment fund structures, tax legislation, and consumer protection issues.
Background: Brexit added significant complexity to fund management firms that operate in Europe. Regulatory changes and the possibility of losing access to the single market have led to a growing shift toward Dublin and Luxembourg for fund managers. Post-Brexit, financial services firms will have to rely on local substance to replace the EU passport to retain market access, which will imply minimum levels of staffing and systems. This upheaval is a challenge for many small and midsize firms. For midsize asset managers, an alternative solution has been the appointment of a third-party ManCo. The European Securities and Markets Authority (ESMA) was vocal about the need for substance and clearly saw the need to strengthen its ability—and that of local regulators’—to supervise relocating funds. Given the fast growth seen in the third-party ManCo space, a valid question is how national and EU regulators perceive this model versus the alternatives.
Our Process: Over three weeks, Capstone conducted a rigorous review of the public record of existing and proposed regulation and legislation. We combined this research with targeted conversations with relevant regulators, policymakers, and other stakeholders to assess the risks and opportunities the target firm faced.
Our Outreach: Over the years, we have conducted several engagements for leading private equity firms to evaluate investment opportunities in firms focusing on governance, risk management, and compliance (GRC) solutions, with recent projects involving firms that provide outsourcing and managed services to the asset management industry. As a result of these projects, we developed strong relationships with international, European, and national policymakers, as well as other key stakeholders in the asset management sector, tax policy, and fund services industries. During this engagement, we conducted 21 productive one-on-one conversations with senior regulators, policymakers, and industry stakeholders.
The Outcome: Capstone provided our clients with an in-depth final report, in addition to regular update calls and presentations, on the evolving policy environment, policy risks, and opportunities that will affect the company in the coming years.