Service Providers For ADGM Investment Funds
The ADGM is an upcoming international financial centre in the MENA region for business and fintech. The quality of ADGM’s independent regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in Abu Dhabi and the greater MENA region.
Why setup an investment fund in the ADGM?
The ADGM is an upcoming financial hub in the region. Besides offering a wide range of financial service activities, the centre also provides an integrated environment and excellent infrastructure facilities.
The Financial Services Regulatory Authority, or FSRA, acts as the independent regulator of fund managers and investment funds setup in the ADGM, which provides a high degree of comfort to individual and professional investors. The ADGM offers both Domestic Fund Manager and External Fund Manager licenses, both of which allow for the management of Public, Exempt and Qualified Investor Funds. The ADGM Registration Authority (RA) offers multiple fund structures, included open-ended and closed ended investment companies, and GP-LP structures.
With ADGM Funds, Fund Managers can target the GCC market, and the wider MENASA region, taking advantage of the numerous Double Taxation Avoidance Treaties that the UAE has in place. Fund Managers who wish to specifically target the Abu Dhabi sovereign wealth funds, and family offices, will find the ADGM an attractive destination for the purpose. Zero-rate personal and corporate tax also make the ADGM an attractive destination to setup and manage investment funds.
You can read more about ADGM Investment Funds here
Here are some specific advantages of establishing in the Abu Dhabi Global Market
LEGAL AND REGULATORY FRAMEWORK:
- Legal framework supports cross-border activities
- 100% foreign ownership permitted
- No restriction on foreign talent or employees
- No restrictions on capital repatriation
- Zero tax for 50 years on profits, capital or assets from 2004
- Zero tax on employee income
- Well regarded, independent regulator
- Independent, English-speaking, common law judicial system
- Distinct from the UAE legal system
- Risk-based regulatory approach
- Central to regional deal making
- High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions
- World-class regional and international law and auditing firms, and other professional services
- A growing fund domicile in the region
- Management offices, holding companies and family offices are located closer to the assets they own or manage
- The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy
- The UAE plays a central role in the growing South-South trade, principally between Asia and Africa
- Well-positioned to harness the potential of emerging markets.
Third-party ADGM Investment Funds Service Providers
An investment fund in the ADGM requires a basic network of service providers, who carry out key outsourced functions, and help the fund conduct it’s activities.
A fund administrator carries out calculations of Net Asset Values (NAV) of the fund units, manages the investor onboarding process, including subscriptions & redemptions, and does all necessary due diligence on the investors. A fund administrator also prepares financials reports for the fund. In case of open-ended funds, a fund administrator also carries out trade and account processing, confirmation of trades & reconciliations, cash management, shareholder register management, investor document retention and overall investor communication on all reporting and corporate actions.
A Qualified Investor Fund in the ADGM does not have to appoint a fund administrator for closed-ended funds this function can be handled in-house. However, in most cases, a fund administrator brings to the table a lot of benefits that can be valuable especially to smaller funds who cannot carry out this function effectively in-house.
It is mandatory to appoint legal counsel for an investment fund. A typical fund setup involves at the very least, three main documents – a detailed private placement memorandum (PPM), an investment management agreement between the fund manager and the fund, and a fund constitution that serves as the Articles of Association of the fund, and helps govern the internal matters of the fund. Other relevant documents include the information memorandum, which is usually a subset of the PPM, and subscription agreements that can be quite detailed in some cases.
Legal counsel help draft this extensive set of documentation, and review fund marketing material. They also play a role in investor dispute resolution & litigation.
Prime brokers function as the fund’s gateway to the financial markets, by offering services like execution & clearing, securities lending (shorting), and financing (leverage/margin trading). Additional services include financial reporting, operational and risk consulting and management, and these can also be offered by prime brokers. The fee structure for prime brokers tend to vary to other service providers. Fees are normally charged indirectly: Spreads on financing (by offering leverage and facilitating share borrowing for brief sales), trading commissions charged for execution & clearing and costs for custody & clearing services. While startup hedge funds may initially start with one prime broker, over time most hedge funds diversify and retain multiple prime brokers.
All funds require custodians, who safeguard fund assets by providing cash and securities custody services. Custodians offer the hedge fund & investors transparency over assets, and ensure a further layer of operational scrutiny over the security and security of assets. Some prime brokers have custody services as a part of their offerings. However, large hedge funds may plan to use a custodian separate to their prime broker. Custodians may provide additional services, like calculating NAV of a fund, monitor local sub-custodians where region-specific regulatory constraints require institutions to carry assets within a selected jurisdiction and cash management & FX services.
Every fund requires a bank account, which serves as the cash custodian. Investors transfer subscription monies into this bank account, and redemptions are also processed from the fund’s bank account. A fund may open multiple bank accounts in many countries, to facilitate subscriptions. For smaller funds however, one bank account is sufficient.
The FSRA usually requires an external auditor to be appointed for investment funds. Auditors also work with the fund administrator and assess the valuation of the fund and verify the fund’s annual financial statements. In addition, they review the fund’s valuation methodology and its implementation. A consent letter from a suitably-qualified external auditor is required as part of the FSRA-regulatory process.
Other third-party service providers, which are not required but may be used by new hedge funds, are listed below.
An outside/part-time CFO could also be hired to advise on finance-related matter, as startup funds might not want to retain a full-time CFO given budgetary constraints. CFOs work with the auditor and administrator to organize financial statements, oversee income, budgeting & financial planning requirements, manage third-party service providers and supply in-house tax and compliance-related advice.
Hedge Fund Consultants
A third-party hedge fund consultancy is usually engaged to provide marketing services and investor relations. Most startup hedge funds have to present their value proposition to multiple potentials, and marketing documentation not only has to be visually appealing, but also has to convey the offering in an effective manner. Hedge Fund consultancies help in bridging this marketing and sales servicing gap.
Risk & Compliance
An outsourced compliance firm has to be engaged advise on FSRA-compliance-related matters, draft internal AML/KYC policies, procedures and controls, develop appropriate employee training and review existing AML/KYC processes, examine risk-related procedures and methodologies utilized in the hedge fund. Usually, the fund manager’s compliance function is extended to the Fund as well.
Investment funds in the ADGM are able to source clients from multiple countries. These clients may come in through ancillary structures, for tax benefits. An external tax advisor consults on the suitability of fund structures, tax compliance matters and on individual tax-related matters.
Technology & Operations Consultants
Capital markets consulting firms could also be employed by startup investment funds to line up both physical and digital infrastructure for the hedge fund. Consultants may help integrate technology with data feed suppliers and other third-party software platforms, manage document management solutions and style and maintain hedge fund’s public-facing & investor-facing website.
Technology Vendors & Research Boutiques
Investment funds that engage in active trading, usually enter into agreements with data providers like Thompson Reuters, trading terminals such as Bloomberg, news platforms and research boutiques, to make sure that the fund analysts are well equipped for their roles in researching and advising on securities.
ADGM Investment funds may outsource the human resource and recruitment functions to an HR specialist. The role of an HR specialist ranges from sourcing new candidates and graduate recruitment to managing internal training programs, liaising with the CFO and the Finance department for employee payroll and incentive calculation and handling employee disputes.
Setting up a fund structure in the ADGM
Setting up a fund in the ADGM requires either a) setting up a Domestic Fund Manager or b) licensing an existing fund manager in a recognized jurisdiction, to act as the External Fund Manager of the ADGM fund. Read this article to know more about the licensing process and associated costs.
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