02115 Ucits Iv Fund Range Rationalisation

UCITS IVFund Range Rationalisation

First for business. First for people.

AssuranceAsset Management

PwC contacts:

Ken Owens Tel: +353 1 792 8542 Email: [email protected]

Andy O’CallaghanTel: +353 1 792 6247Email: [email protected]

Pat ConveryTel: +353 1 792 8687Email: [email protected]

“Re-structuring strategies and potential for cost savings from fund rationalisation opportunities within UCITS IV”

A key component to UCITS IV is the facilitation of Fund Mergers and Master Feeder Structures within the UCITS regime, a welcome development with the potential for cost savings and added effi ciencies to the UCITS brand. While Fund Mergers were previously allowed at national level, the new UCITS IV regime provides for fund

rationalisation on a cross border basis. UCITS IV brings forward the opportunity for Asset Managers to streamline and optimize their product range to benefi t from greater economies of scale and potential tax savings post re-structuring.

European funds tend to be small when compared with US funds. Like many of the other UCITS IV proposals, it is hoped that allowing Fund Mergers and Master Feeder Structures will promote economies of scale and greater effi ciencies.


Why consider Fund Mergers?The recent market turmoil and conditions have highlighted the many challenges faced by the industry in terms of signifi cant decreases in assets under management and declining profi t margins. Investment managers need to control short-term profi t margin pressures while preparing for future growth. In that context, UCITS IV offers the opportunity for streamlining your Product Portfolio with the introduction of cross border Fund Mergers.

Regardless of the legal form and wherever the location within the EU, UCITS funds should be permitted to merge. Although subject to certain pre-conditions including prior authorisation by the competent authorities of the merging UCITS and defi ned measures to ensure investor protection, each member state must provide for domestic and cross border mergers under national law.

Key criteria when considering cross border and domestic mergers:-• Investor Implications: How is this

likely to impact the tax position of current investors? Can the tax implications of the Rationalisation be managed in an effi cient way?

• Product Portfolio:-Is there alignment of investment strategy and a strategic fi t of product between the proposed merging funds?

• Consideration of investment performance of merging UCITS

• Marketability and product history (sales success to date)

• Fund size & viability of merged UCITS

Location Preference:What is the preferred location for the merging UCITS?

Key considerations:-

• Fiscal & Taxation considerations;

• Knowledge of & familiarity of local legal frameworks;

• Regulatory reputation & responsiveness;

• Locations of Products & current infrastructure; and

• Inward marketing & registration costs.

Fund Mergers:-The Outcome

• Fund Rationalisation & streamlining of Product Portfolio;

• Amalgamation of smaller AUM funds, increased economies of scale & competitiveness with international markets;

• Larger AUM funds with strong track records optimising market share; and

• Potentially lower TER’s for investors and opportunity for reduced operating costs leading to increased profi t margins.

Investment managers need to control short-term profi t margin pressures while preparing for future growth.

Key challenges for Fund Mergers

While the introduction of cross border fund mergers is a welcome development, certain factors have been identifi ed that may prove challenging during the merger process:-

• Tax implications – evaluating the tax implications of fund mergers for the underlying investor and the management company may prove challenging while there are different taxes regimes in the respective countries of residence and until such time as the merging of UCITS is recognised as a tax neutral event;

• The drawing up of common draft terms of the potential merger and merger rationale to the investors of both the merging and receiving UCITS and impact assessment of the proposed merger;

• The valuation of assets and determination of the calculation method of the exchange ratio; and

• Avoiding an excessive outfl ow of AUM for the merging fund at the point of merger.

Master Feeder Structures:-UCITS IV proposals also provide for asset pooling measures through the facilitation of Master Feeder structures. While Master Feeder structures already exist in some

jurisdictions at national level, the proposals under the UCITS IV create further opportunities for greater economies of scale and the potential reduction of TER’s through the facilitation of cross border Master Feeder structures and enabling one or more feeder funds to pool their assets in a single master fund.

Key requirements for Master Feeder Structures within UCITS:-• The Master and each of

the Feeders must each be established as a UCITS fund;

• Each Feeder Fund is required to invest at least 85% of their assets into the Master Fund, with a maximum of 15% of their assets


held in ancillary liquid assets, fi nancial derivative instruments or in the case of investment companies, property essential for the direct pursuit of business;

• To avoid the creation of opaque structures, the Master Fund may not be itself a Feeder Fund nor may it invest in the units of another Feeder Fund. The Master Fund must provide a declaration to the effect that it does not hold any units of a feeder fund as part of the approval process;

• The Master, or one or more Feeders may be located in different Member States;

• The Home State Regulator of the Feeder Fund must approve its investment policy;

• If the Master Fund and the Feeder Fund are established in different; jurisdictions, the Master Fund must also demonstrate that it is a UCITS fund and that it is not itself a Feeder Fund;

• The Master Fund and the Feeder Fund must enter into a legally binding agreement;

• The Feeder Fund and the Master Fund may have different custodians or auditors, however, if this is the case, the parties must enter into an information sharing agreement; and

• The Feeder UCITS must act in the best interest of its unit-holders and in doing so shall monitor effectively the activity of the Master UCITS.

Key Challenges for Master Feeder StructuresThe key challenges to implementing Master Feeder Structures will include:-

• Drafting of legal documentation and enforceable agreements which the Master and Feeder UCITS must enter into or the internal conduct of business rules where both are managed by the same management company;

• Effective monitoring and information sharing of Master by the Feeder Funds;

• Market timing & impact of events of the Master Fund affecting the Feeder Funds;

Master A Master XY

Feeder Feeder Feeder

Inve

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eder

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Example of Asset Pooling within Master Feeder Structure


• Provision of investor information and information fl ows between custodian of Master and Feeder UCITS;

• Analysis of tax implications pre & post restructuring;

• Avoidance of a taxable event for investors on restructure;

• Maintaining investor tax effi ciencies of existing structures; and

• Minimising any additional costs (e.g. transfer taxes) arising on restructuring.

How we can help?PwC can provide a range of services to assist you in determining your Fund Rationalisation / Re-structuring Programme, whether assisting with the initial feasibility work and impact analysis and in terms of identifying the potential cost savings to be gained from a rationalisation programme. We have a fully integrated Asset Management service offering for Asset Managers operating and distributing UCITS funds.

Our Services comprise of the following:-1. Our tax services include:

• Fund redomiciliation and migration services, including Implementation of Master/Feeder structures;

• Global Fund Distribution solutions;

• Ongoing regulatory and tax reporting to ensure compliance with cross border requirements in relevant jurisdictions;

• Tax effi cient investment strategies;

• Product structuring of a cross border platform; and

• VAT advice and structuring.


We can help you to determine the appropriate structure and framework for your UCITS Product suite under the new UCITS IV regime. We have extensive experience in assessing taxation and regulatory implications of Fund Rationalisation. PwC operates a Global Fund Distribution service designed to provide Asset Managers with a series of solutions to ensure effi cient and effective cross border strategies.

2. Assessment & feasibility study on rationalisation of EU domiciled activities –

Focusing on the following:-

• Product Structure and Investment Strategy;

• Marketing & Distribution; and

• Management Company & related Administration activities.

As part of the feasibility study, we will analyse the respective qualities of domiciling each entity structure in a particular Member State. Our review criteria will consist of the following:-

• Assessment of fi scal environment to maximise investment tax effi ciencies;

• Consideration of impact of fund reorganisations for international investors;

• Assessment of the regulatory environment;

• Consideration of the legal and political principles;

• Fiscal & local taxation arrangements;

• Government incentives & local inducements;

• Staffi ng & resource capabilities;

• Local compliance & corporate governance requirements; and

• Marketability & passporting arrangements.

3. Business Rationalisation Services:-

• As part of the feasibility study, we will analyse the respective qualities of domiciling each entity structure in a particular member state;

• We will assist with optimising the tax effi ciency of the structuring through the management of investors taxes, fund taxes and portfolio taxes where possible;

• This will include a review of the capital gain taxes, VAT and other transfer taxes applicable to the restructuring;


• We will assist with the transfer of existing services to the core business location of choice best suited to your corporate structure and strategy;

• Services will include corporate set ups, liquidation of existing structures, regulatory and advisory assistance; and

• In addition to our taxation services and re-structuring analysis, we can also provide the following services, our one stop shop to Fund Rationalisation:-

– Regulatory Advisory Services

– Legal Services

– Company Secretarial Services

– Global Human Resources Services

– Operational Services

– Company Audit


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02115 Ucits Iv Fund Range Rationalisation

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