Investment Funds Solutions as Private Wealth Management Structure for Private Assets Holders - High Net Worth Individuals
In one of its early editions this year, French daily magazine Le Monde, published an Article with a title OpenLux : des oligarques et de riches familles pris au piège de leur propre labyrinthe financier (lemonde.fr) that could be translated as follows: Oligarchs and rich families in the trap of their own financial labyrinths. The Article described the risks from wealth management through the non-transparent structures and trustee solutions. An asset holder lost his fortune in result of non-honest behavior resulting in appropriation of entrusted assets. And situation happened in very reputable European jurisdiction and not in far offshore coasts. The reference was made to the recent case in Luxembourg, where an asset owner, who entrusted management of his personal assets to a trustee, had discovered on his return back to the trustee in 5 years that his assets were lost and appropriated by the trustee. The entrusted persons not only managed the assets on their own discretion without considering interests of the trustor, but even more, had misused these assets for their personal purposes and even spent it for personal use.
Such situation would never happen, where private assets holding would had been structured through regulated investment funds vehicles with its management entrusted to an independent regulated alternative investment company (AIFM). As assets hold through regulated investment funds are managed by independent third-party manager operating within strictly regulated and rigorously monitored multiple policies and procedures, having independent risk function, involved in management process, to prevent any possible misuse or any other risk situation at all stages of investment process from subscriptions of investors, through investment by managers and to disinvestment and distribution back to investors. In such construct, numerous types of independent professional market participants controlling each other on prevention of any potential risk of abuse. Each of them having multiple level of internal control (three defense level) on any transaction to prevent possible abuse. Moreover, the regulation for alternative funds managers is very transparent and unified though the whole Europe, that provides for clear look through the rules easy for understanding despite the jurisdiction where the company is located.
Main milestones, securing independent and impartial multilevel control over the assets, are following:
- The asset management by an AIFM is operated only within specific investment strategy which is set up for each specific fund, and extensive and very detailed operational procedures set up for the management company and verified by the public body – Financial Market Supervising Authority. The AIFM also mandatory has an independent valuation and risk assessment at all stage of the investment cycle. Risk and Compliance Officers each time ensure that any investment or divestment decision is implemented within the strictly prescribed investment strategy, defined in the fund’s prospectus and in accordance with internal fixed process and other operating procedures set up by the Management Company to ensure impartial management of assets. Any changes to these documents run through special process and disclosure to the public body, making impossible any abusive change to it in order to legitimate abusive investment action.
- The register of shareholders is usually kept by another independent entity, called central Administration and Transfer Agent, being itself verified and scrupulously supervised by Financial Market Supervising Authority.
- The holders of Portfolio & Risk Function are thoroughly verified and monitored by Financial Market Supervising Authority in course of AIFM authorization and consecutive operation. Regular NAV calculations and substantial organizational changes are also disclosed to the Financial Market Supervising Authority.
- The assets of alternative investment funds are kept with independent depository, which in most cases is a bank, playing the role of custodian, which is being strictly regulated and supervised by public market supervising authority. The bank or custodian function is not only keeping the assets, but having also the function to secure that the use and disposal of assets is happening in accordance with legal and regulatory prescriptions, the bank as custodian is obliged to report and stop any suspicious transactions in case of any sign of misuse or abuse of powers by the manager. Thus any potentially fraud action would be stopped at execution stage.
- Annual accounts verified by independent auditors and compliance of the investment process with internal operating procedures by another independent company, findings of which are disclosed to the Financial Market Supervising Authority. In addition to usual verification of the plausibility of accounting figures, in funds industry auditors have an extended obligation to review also material aspects of operations such as related party transactions with conflict of interest, etc.
- In addition to audit of accounts there is also regular review of operational procedures of the management company for conformity of its decisions by independent company, called internal auditor, whose main focus is audit of internal management procedures of the fund manager.
Wealth structuring through investment funds with management by an independent AIFM is a guarantee of preventing any improper behavior in course the asset management, the process of asset management supervised by public bodies. While the public authority has not a function to define the management of the assets itself, and not questioning the investment targets, but at its function focused on control of implementation of internal control mechanisms, such as policies and procedures, organizational structure and professional qualification and personal reputation of the key management, and alarming and control mechanisms, provides for a solid guaranteed framework of operation where the interests of the investors will not be disregarded. Thus, Investment Funds represents very efficient tool for Private Asset Holders, especially such as High Net Worth Individuals, to hand over operational management of their wealth to independent investment professionals, without concerns about being misused by its managers.
Volodymyr Andrianov: Risk Function inside the AIFM
XOLARIS is now in its eleventh year of existence. Having started as a classic back-office outsourcer based in Constance, we have now developed into an international structuring and fund management platform for real assets, with offices in Liechtenstein, Germany, France, Singapore and Hong Kong.
In this regard, our growth is consistently breaking new ground.
When we made the decision to set up KVG, an independent service, in 2014, many people agreed that there would be no market for this service.
Today, the ManCo market is one of the fastest growing markets. Expansion into Asia in 2018 laid the foundations for internationalisation, which, in the capacity of first foreign market participant, reached another milestone in 2020, with relocation of the holding company to Liechtenstein and acquisition of the AIFM licence. As the next AIFM location, Paris is the logical next step of the XOLARIS Group’s success story.
In this context, it was and is always important to us that we remain true to our roots in the real asset business. We will continue to maintain this focus as we move towards becoming a global real asset investment group.
With our new CI, we want to break new ground in this area. The first edition of Market News as well as our podcasts, constitute another step in the development of the Group.
I would like to take this opportunity to thank all my colleagues, without whose great work the success of XOLARIS would not have been possible.
I hope you like our new format as well. Even so, we are open to suggestions and criticism and look forward to your feedback.