The Banking Problem

P Publications

June 01, 2022

NCM were delighted to have our Finance Director, Douglas Graham, feature a guest article “The Banking Problem” in the Alvarez & Marsal May 2022 Taxand Asset Manager Briefing Note. Read the article below: 

 

When working with fund managers who are launching a new fund NCM are often asked what will be the slowest part of the process. Historically, drawing up the various governing documents and agreeing the terms of the limited partnership agreement with investors was, as you would expect, the clear winner. Now, however, the opening of the fund bank account is by far and away the slowest element within the process and needs to be factored into any proposed timetable from the outset. The time lag between the legal entity being registered with Companies House and having a working online bank account can be significant, and in some case can take as long as four months.

 

With legal firms no longer keen to use their client account to take investor funds on fund closure, the delay in opening the fund bank account is causing, at best, stress or in many cases, a delay to the fund launch. This can have a knock-on impact on investors and early investments that the fund is looking to make. The factors at play in this sometimes tortuous process seem to be a combination of more stringent AML regulations, the nature of fund structures themselves; and the appetite and available resource within the traditional high street banks for dealing with less familiar ‘corporate’ accounts. An example of where we have seen increased diligence in recent years is the requirement to evidence source of funds and provide detailed tax and AML information on beneficial owners and significant controllers. Most banks also now wish a call or face to face meeting with the fund principals to discuss the use of the vehicle, projected volume of transactions and cash flows through the account. While these are the right questions to ask, there appears to be a lack of urgency in processing the information collected as well as evidence of a disjointed approach which means it can take a disproportionate amount of time to get through this fact find stage.

 

In terms of fund structures, the LP or LLP is often set up with the beneficial owner being the General Partner or the designated members, respectively. At the point of fund launch, the new investors become the significant limited partners. By its very nature, the ownership of the fund can change significantly between submission of the bank account opening forms and the eventual account opening four months later. Service providers such as NCM therefore end up answering numerous banking queries with information that supersedes previous submissions and there is a challenge to assist the banks in understanding and reconciling these movements without filling out all the bank forms again. What makes this process even harder post covid is that email is now the preferred method of communication. With many banks working on a circa five day response time to emails this further delays the process.

 

There is some light at the end of the tunnel with new online providers entering the market. These tend to be historic or new FX businesses who have more of an appetite for the banking of fund structures and are designing their account opening process using IT platforms to streamline the end to end experience.  Not surprisingly they do charge more but that must be weighed up against the desire to get the fund launched in order to facilitate the investment process. 

 

In the meantime we suggest that managers start the process as soon as possible to avoid any disruption as they move towards that first close. It is also something managers should discuss with their legal advisors and fund administrators at the outset to ensure they are working on this to avoid absorbing management time during the fundraising period.