The benefits of using an external provider for the risk management function in Alternative Investment Fund Managers (AIFMs)

Using an external provider has become a strategic tool for Luxembourg AIFMs to access specialised skills, reduce costs, and enhance operational agility. In recent years, many AIFMs have been revisiting their outsourcing models to optimise efficiency and streamline processes. This reassessment has led to a growing trend towards hybrid outsourcing, which combines local leadership and onshore project management with access to cost-effective offshore talent pools. This approach allows AIFMs to maintain oversight and quality control while benefiting from lower operational costs.

One of the essential roles within an AIFM is the conducting officer in charge of risk management, a regulatory requirement that cannot be overlooked. Outsourcing this role to an external provider can offer significant advantages.

Cost efficiency and focus on core investment activities

Maintaining a permanent, in-house risk management team can be financially burdensome for AIFMs. Certain AIFMs may not require a Full-Time Equivalent (FTE) for risk management, yet they must still meet the same regulatory obligations regardless of the number of funds under management or the complexity of their investment structures. This can lead to inefficiencies and increased administrative overhead. External providers offer specialised risk management services on an as-needed basis, which can significantly reduce costs. By outsourcing this function, AIFMs can allocate their resources more effectively, ensuring that their primary focus remains on core investment activities rather than on the administrative and operational aspects of risk management.

Access to expertise and market practices

Third-party providers bring a wealth of experience and specialised knowledge in risk management. Given their extensive client base, they are aware of current market practices and can provide valuable, industry-specific advice. They stay updated with the latest regulatory changes and industry best practices, ensuring that the AIFM’s risk management framework is robust and compliant. This level of expertise can be particularly beneficial for smaller AIFMs that may not have the internal capacity to develop and maintain such expertise.

Scalability and flexibility

AIFMs can scale services up or down based on their needs, which is particularly advantageous for those with fluctuating activity levels. External providers can quickly adapt to changes in the AIFM’s operations, ensuring continuous and effective risk management without the need for significant internal adjustments.

Regulatory compliance

Navigating the complex regulatory landscape is a significant challenge for AIFMs. External providers are well-versed in the requirements set forth by the AIFMD, AIFM law, CSSF Circulars and other relevant regulations. By leveraging their expertise, AIFMs can ensure compliance with regulatory standards, reducing the risk of non-compliance and associated penalties.

Enhanced risk management tools

External providers offer advanced risk management tools and methodologies that may not be available in-house. They can provide comprehensive risk assessments, monitoring, and reporting, tailored to the specific needs of the AIFM. This enhances the overall risk management process, ensuring that potential risks are identified, measured, and mitigated effectively.

Conclusion

At Value Partners, we understand the critical importance of a robust and compliant risk management function within an AIFM. We are pleased to offer our expertise and support to accompany your AIFM in facing challenges and maintaining its permanent risk management function. Our team of experienced professionals is dedicated to providing tailored risk management solutions that align with your specific needs and regulatory requirements. By partnering with us, you can ensure that your risk management framework remains effective, up-to-date, and fully compliant with industry standards. One Mission. Yours.

Written by Jonathan Csikai, Senior Manager within the regulatory services department at Value Partners S.A.