Don’t fear the Depositary – debunking the myths

The depositary aspect of the AIFMD was a source of concern before and during implementation. But now the new regime has just finished celebrating its first birthday, Ian Kelly, CEO Augentius, sat down with some of the company’s depositary clients to discover what living with a depositary has really been like for them. The overwhelming feedback is that the function hasn’t been a burden, and can actually provide value.

Myth 1: Appointing a depositary is a cumbersome process

Given that the depositary needs to be plugged into the day-to-day running of a fund, there were considerable fears that the very process of appointing a depositary would prove distractingly bureaucratic and drawn-out.

In reality, however, this isn’t necessarily the case. While it depends to some extent on your firm’s ability to embed a new service provider speedily, once a depositary is appointed the process is quick.

The slowest aspect of the initial work comes from securing third party access for the depositary to the fund’s bank accounts so that it can perform its cash monitoring function. But experience has shown that this is a relatively simple and painless task – and in any event it is all managed by the depositary.

Myth 2: Cash monitoring is intrusive

This is the most volumous part of the depositary function in terms of the daily checks that need to be made. Consequently it was one of the main causes of concern for managers pre-implementation, in terms of its potential to get in the way of day-to-day activity.

However the feedback from clients shows that this isn’t the case. Bespoke solutions, using auto-reconciliation processes that tailor these checks around a fund’s existing procedures allow the work to be done in the background, invisible to the manager. This is an important differentiator to look for when selecting a depositary as one-size-fits-all approaches can be intrusive. It is also an argument in favour of appointing a depositary with specific expertise concerning your type of fund or asset class.

Of course, this function means giving the depositary read-only access to your fund accounts. But the more this process can be automated from the start the better, as manual solutions really just do not work.

Myth 3: Asset verification can alienate asset holders and delay deals

This is the most complex of the depositary functions: but that complexity is a challenge for the depositary, not the manager. All the manager has to do is submit the required documents (all fairly straightforward) on completion of a deal, and maybe answer simple follow-up questions in the case of unusual transactions.

There were concerns that this process could involve unwarranted ‘hassling’ of asset holders. But experience has shown that as long as the process is carried out by experienced professionals, this hasn’t been the case. At most, the manager may have to do some initial ‘facilitating’ of contact with asset holders to assuage confusion as to why they’re being approached.

For a while during pre-implementation, it looked as if the Directive would require depositaries to verify information before the closure of a deal. This would have been incredibly disruptive. Thankfully this didn’t come to pass, but it’s worth ensuring your depositary only requests information after deal closure.

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