When looking for the right financial solution to offer a portfolio on liquid or even non-bankable assets, many clients are faced with an immense choice of options from the securitization as well as fund world. In this article we present a few of these solutions based on size, a primary criterion. We hope to illustrate that the vital role that the starting size plays in the selection process.
For Actively Managed Certificates (AMCs) as well as for fund solutions, the underlying asset is an important cost differentiator. The underlying processes differ greatly between investments in bankable assets (such as equities, bonds, currencies, and more) and non-bankable assets (such as private equity or debt), so the associated structural costs and thus also the necessary assets under management (AUM) vary significantly. In general, solutions on non-bankable assets require larger starting amounts than those on bankable assets.
The planned starting size of an investment portfolio can widen and narrow the range of possible solutions, which can also indirectly influence the overall capital search due to the desired quality characteristics from the investors. Smaller starting amounts of only EUR 1-5 million are suitable for a relatively inexpensive Guernsey solution, although we also see clients who want to have a Luxembourg AMC set up for as little as EUR 3-5 million and have the associated ongoing costs charged directly to them. This avoids performance being impacted by the ongoing fees. In return, they get a better-quality format that is audited and generally well received by investors.
For larger starting amounts, from about EUR 30 million, one could also consider possible fund solutions, although this is only worthwhile from approximately EUR 60 million compared to an AMC. Sometimes clients want to start with smaller amounts, but this is often more expensive than a less expensive Luxembourg AMC format. The difficulty here is that, for many fund providers and custodian banks, a smaller fund launch is hardly profitable. Even if the legal framework would allow, for instance, an Alternative Investment Fund (AIF) starting from single digit millions, the search for suitable partners can prove extremely difficult and these offers can quickly become overpriced. Bear in mind that the minimum expenses and structure of a smaller fund are identical to those of a larger fund. In essence, it is only a matter of how much the solution provider and the custodian bank want to charge the client for such a service. The cumulative minimum fees, which would then be fixed across the various stakeholders, can quickly add up to 30-40 basis points (bps) or more for smaller undertakings compared to an AMC solution.
Of course, all clients in principle would like to run an AIF format because it would provide them with a far more accepted format that is also preferred by institutional investors. However, the costs should align with the initial launch size so that they make economic sense. Many of the AIF investors also want to see a minimum fund size of EUR 100 million with a three-year track record before they even consider an investment. By then, finding investors can prove challenging even with an AIF format, and the associated costs may eat up a large portion of the management fees in the meantime, leaving little revenue to the client. Economically it is therefore questionable to launch an AIF format with smaller amounts, even if such a format sounds ostensibly great.
Thus, a client should be aware of this trade off and should consider starting with a more cost-effective and more suitable product solution. With the existing investor base and possibly further new commitments, it is easier and more commercially meaningful to transition to an AIF format. We will be happy to answer any more questions you may have as we accompany you on your journey. Please do not hesitate to contact us; we will be delighted to assist you.