Entity rationalisation – a catalyst for change
By Seema Chandaria and Jeremy Evans
With economic headwinds strengthening, fund managers should be exploring every possible operational improvement; entity rationalisation could help
The global economy is in a cyclical downturn. For fund sponsors, this economic climate, coupled with complex global regulatory and reporting demands, means increased risk, cost, and a drain on capital resources. Ultimately that means reduced returns for both investors and the sponsor itself. It is therefore important for fund managers to assess whether they can make any improvements to their current operations.
One approach to cost cutting is simplification via entity rationalisation. It gives fund managers an opportunity to re-evaluate their internal set-ups and to adapt their existing products for this backdrop of fiscal uncertainty and increasing regulatory and economic constraints.
What is entity rationalisation?
In broad terms, rationalisation refers to the reorganisation or simplification of a group’s legal structure. The end goal is to reduce costs, optimise existing products, simplify the product offering and maximise efficiencies. That should result in a group configuration that is better aligned with business strategy.
What are the key benefits?
There may be a number of benefits to entity rationalisation, including:
- reduced direct and indirect costs associated with the maintenance of legal structures, as well as related administrative, regulatory and compliance savings;
- the opportunity to rationalise the firm’s product offering;
- improved transparency;
- the potential to free up business capacity, enabling personnel to spend more time activities that create value;
- the chance to evaluate each entity’s long-term utility within the group, and to review any legacy assets and/or liabilities.
What should fund managers be looking for?
Simplifying a group’s structure may make sense at the management level, the fund level and potentially even at the below-fund level. Managers might therefore consider entity rationalisation in a number of instances.
For example, a product may:
- be sustaining costs that outweigh the benefit of its continued operation;
- be underperforming or sub-scale in size, resulting in disproportionate costs for investors;
- no longer be used or fit for purpose – for example, the initial structuring put in place given certain tax considerations may no longer be viable or necessary;
- have significant overlap with another product in the broader group structure – for example, with respect to investment objective and strategy;
- benefit from certain adjustments to better align itself with recent legislative or regulatory changes.
Fund managers may also review structuring below their funds to determine whether the existing investment-holding entities and other structures remain useful and fit for their intended purpose.
Determining whether entity rationalisation is the right move is a balancing act for fund managers – is the opportunity worth more than the cost of the exercise? It is important to note that the nature of the assets within a structure, the regulatory posture of the entities and whether the entities have direct investors may all have a bearing on what options are available.
Fund managers should bear in mind that the entity rationalisation process entails upfront investment both in terms of time and expenditure. Appropriate resourcing – internal and/or external – will be required for due diligence and other essential regulatory and/or legal exercises. It may or may not be possible to pass on some or all of these additional costs to investors, depending on the fund’s terms.
Still, if entity rationalisation proves to be viable, the investment in the short term may well relieve a fund – and, consequently, its investors – from unnecessary financial burdens in the long run.
How can PwC help?
PwC has developed an end-to-end programme to support its clients and navigate them through the complexities of the entity rationalisation process.
We are able to draw on multi-jurisdictional subject matter expertise across legal, regulatory and tax disciplines, leveraging analytics and technology tools to maximise efficiency and deliver a streamlined transformation programme.
We also work alongside our clients to provide:
- analysis of cost savings;
- preparation of investor communications;
- associated amendments to legal documents;
- day-to-day management of the fund rationalisation programme, including coordination with local counsel; and linkage across all workstreams.
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