HedgeNews Africa sits down with Andrew Wolfson and Emile Fourie of Orpheus Capital to talk about the evolving world of personalised securitisation solutions and, in particular, actively managed certificates (AMCs).
Founder and CEO Wolfson has many years of market experience, including 10 years in global trading and structuring, eight years as the head of structured products and alternative investments at Cadiz and more than nine years with the FirstRand Group, involved with idea generation and structuring across Aldermore Bank, FirstRand, FNB, Ashburton, and RMB Global Markets.
Now based in London, he founded Orpheus Capital in 2021. Orpheus provides technical, operational and business consultancy services to companies in the UK, South Africa, the Channel Islands, Israel, Australia, the Middle East, and Switzerland that offer structured investments to retail, wealth and institutional investors.
Managing partner Fourie, a chartered accountant, was previously a senior tax manager at PwC before holding the role of tax risk manager at the FirstRand Group for seven years, where he worked across various sectors within the group, ranging from the global trading desk, asset managers, prime broking, treasury, corporate finance, private equity, merger and acquisitions and cross-border transactions.
Orpheus and its related partners have USD 3.5 billion of assets under service and more than 1,200 investment products issued from over 250 clients. They are engaged with family offices, wealth firms, banks, brokers, structured product providers, asset managers, hedge fund managers, venture capitalists, private equity specialists, and project owners. They continue to expand the possibilities and foster greater inclusivity and innovation.
What led you to launch Orpheus, and what do you do?
AW: For us, it is about the democratisation of securitisation – these days, it is possible for asset owners to access their investors directly without high costs. You can turn any investment idea into a bankable security.
Traditionally, only specialised institutions like banks and large asset managers have had the resources and expertise to issue financial products, especially when the products are based on complex or unconventional assets. The common methods for bringing these products to market, such as setting up a mutual fund or limited partnership, are resource-in-tensive and often require navigating complex regulatory frameworks.
We have become subject matter experts with decades of experience, chiefly in investment banking and asset management. By making assets manageable and bankable, we enable our clients to thrive and democratise the world of financial issuance.
We do have an issuance platform, but in effect, we deal with the hurdles of connecting the investor to the asset owner, whether he be a hedge fund or a mining project or if the investment happens to be investment-grade diamonds or physical gold. We’ll assemble all the various modules and connectors that make it happen.
We facilitate the issuance of AMCs, credit-linked notes and trackers via protected cell companies, turning any investment idea into a bankable solution.
Actively managed certificates (AMCs) are a big part of your product line. What is your thinking there?
AW: Emile and I started to analyse problems we were seeing in the marketplace – people were raising offshore funding and could not connect that to their local projects. There were cases ranging from eco-friendly student villages to renewable projects to agri-tech renewables and impact farming. We found a solid case for using AMCs in private markets, and to provide dynamic structured products that allow active management and a discretionary investment style.
From there, we have assisted people in everything from hedge fund strategies to liquid equity strategies to structured products. We are in the process of helping a fixed-interest hedge fund with its strategy. We have a client who’s doing multi-asset and a portfolio manager involved with private equity and venture capital opportunities. We even have a client who wants a tracker on diamonds with the liquidity of an ETF. It is a great mix of helping people get to their investors.
How is your AMC offering structured?
EF: Switzerland has created the concept for on-exchange private placements with specific rules. We have leveraged European exchange legislation and can issue a ring-fenced note for investors that references the actual physical underlying. This means there is no balance sheet risk, no credit risk on a bank, and no bank in any of the transactions. You do have a broker or paying agent involved, obviously, to clear it via the exchange. Assets are in bankable Swiss securities (Swiss ISIN).
We have introduced a ‘plug-and-play’ securitisation service leveraging next-generation AMCs and the advanced digital platform our partners offer.
AMCs offer remarkable flexibility for tailoring investment strategies. They can be created for various ticket sizes across a wide range of asset classes.
New product lines can launch quickly with a streamlined, cost-effective process. Furthermore, next-generation AMCs are not subject to common restrictions that affect traditional structured product issuers, such as credit risk.
You’ve chosen a third-party approach?
AW: We are an enablement business. Banks and brokers like Goldman Sachs, Morgan Stanley, UBS, and Leonteq, typically sell you their offshore AMCs. Buying their AMCs brings you and your investors into their eco-system. They provide everything – broking, trading, and administration.
The fact that we offer third-party solutions means that we are in discussions with all sorts of service providers – for example, with fund administrators on how to help clients reach various stages of growth. Do they need a fund vehicle, or can they continue with an AMC? Is it a question of scale? Ultimately, any solution should be driven by client needs.
If a client turned around and said ‘thanks very much’ after a one-hour discussion because we helped them understand that a CIS fund is what they needed, then I would also consider that a job well done. Our job is actually to help someone get to the solution. And we are happy to hold a client’s hand through the process.
For us, it is important to have trust in the equation. Many people remember us from our earlier days in the market, which is why we have a lot of clients in South Africa. They come to us with questions, and we help solve problems.
I love the interesting cases we get. Yes, we all want things to be simple and straightforward, but then a hedge fund manager comes to me because he’s got a Cayman fund and a client sitting in Europe who wants to invest in his fund but cannot for various reasons. Suddenly, you put together a tracker on his fund, which bridges the gap as they can buy it through the Swiss exchange and clearing system. You have put a mechanism in place to enable someone to buy something that they otherwise wouldn’t.
Being independent and having the right partners truly allows us to serve product managers best to serve their investors better.
What about governance and regulation?
AW: We deal with people who regard an AMC as an unregulated fund. Well, yes, it is not regulated as a UCITS fund might be, but it is covered by securities regulation.
If you go to the paying agent, in our case regulated by FINMA (the Swiss Financial Market Supervisory Authority), he will not just issue a product unless he is happy with all the disclosures and understandings. If there is any marketing information, they want to make sure that it is all clear. The paying agent is the first person to confirm that the mandate is in order.
Another point pertaining to governance is that most AMCs are issued as private placements, not public offers. That in itself means those who are offering them confirm the viability of the AMC and the suitability to their client needs, carefully considering the risks that may occur. The fiduciary responsibility remains.
What is the benefit of using an AMC for an asset manager – are they more suitable for managers of a certain size?
AW: It works for a smaller South African manager looking to trade an offshore product. If you are going offshore and do not have $50 million, then yes, the answer is you can get going. In our world, we want to help people get going, whether they have $100,000, $1 million, $50 million or more.
With liquid strategies, people can start with assets of $100,000 upwards. Their goals might be that when they get to an AUM of more than $50 million, they might consider whether they need a UCITS fund or other such fund.
In another area, a larger PE/VC fund may be raising capital, but they have a broad range of investors who want to access it.
Even in the institutional world, clients might want to create their own solution with specific exposure instead of having a private equity investment with a 350-page side letter. The termsheet can act similarly to the side letter.
One client said: “I want to invest in African private equity, but I don’t want Francophone Africa and certain other countries.” Now in the world of AMCs, it becomes easy. We create one security, specifically defining that it can invest in various assets, but specifically excluding as required. Now you have your own mandate. Another client comes along, and he wants something slightly different. This is nothing more than a segregated mandate delivered with a security identifier that can be delivered to any suitable investor with more than $10,000.
We have a client who already provides what we call “mass customised portfolio management” because he has taken individual high-net-worth clients and given each client their own AMCs. The wealth manager for each client can now buy structured products, funds, hedge funds, equities, bonds, and other AMCs being issued. He is the regulated product manager, delivering tax-efficient and cost-effective solutions to serve his clients best.
How does an AMC differ from a trust?
EF: The other area where we see AMCs being used is as an alternative to trust structures. Trusts have become quite onerous and complicated to run. With an AMC, you can get the same benefits. More than $1 trillion is invested in AMCs, and there’s been a massive shift in Europe from wealthy people to AMCs. Personalised securitisation solutions on any asset you can imagine being available to any investor are already here. It is less expensive and less onerous on the admin side.
How is the AMC landscape evolving in South Africa?
EF: South Africa is quite sophisticated in its banking and investment systems. However, it is difficult for the market to support AMCs as we see them offshore. The regulations and laws, specifically the Exchange Control Act, the Stock Exchange Act, and then on the financial markets side, the Banks Act and the Commercial Paper Act, have not been consolidated. They are all very diverse and look at isolated cases. Then, you add the Collective Investment Schemes Control Act, which further complicates matters.
In our view, what you see in the market is nothing more than debt. You can have an equity-like AMC, but it is with very specific terms and that is problem one.
Another problem is that due to current legislation, only banks can issue something like an AMC. The rest of the world moved on many years ago, and South Africa has not caught up.
Standard Bank has just started issuing a few AMCs. UBS has done it very successfully. They are not South African and have leveraged that to use an inward-listed note. For a local institution to issue a foreign AMC, it needs to leverage its balance sheet.
The legislation is actually against anybody who is South Africa-based and incorporated. AMCs have a limited application at the moment because of that. On the other side of the coin sits the JSE which provides access to private markets. Raising debt, or finance, is limited because the Stock Exchange Act actually does not allow them to issue their own notes. You either list as normal equity shares or preference shares. Debt is limited because of the Commercial Paper Act.
What are the tax implications of AMCs?
EF: Tax and AMCs are also complicated in South Africa. For tax purposes, an AMC is viewed as either gross income or capital gains tax (CGT).
In Europe, they do not have the concept of dividends. So it is either taxable or CGT. It is quite clear to say it is not interest.
Offshore, it is a far simpler debate because the note sits in a company, the note rolls up, and only when you realise the return does it trigger the tax. The SA space is actually limited in what you can reference in the underlying, whereas in the foreign AMCs, it is more open-ended.
The second problem for SA is in the Income Tax Act, Section 90, in terms of connected foreign company legislation. If you hold over 50% of the equity shares, voting rights or control in a foreign issuer, you are taxed as if you are a South African company. So yes, there are many issues that investors need to be aware of.
South Africa has the ability to provide solutions for these issues, but it will take time, and we are lagging behind. Right now, offshore solutions are the answer. We do not have a local solution.
Another interesting tax area is when you regard the issue of hedge funds being taxed on trading in their portfolios. If your strategy is held in an AMC, your portfolio now holds this security that you sell only because you have an outflow. The trading within is not taxed because you are basically tracking an active index, which is your strategy managed with your broker in the same way as you are managing all your mandates. That is another reason why such things become very powerful or useful for South Africans.
Do you plan to offer a domestic AMC in addition to your offshore structures?
AW: In our world, very few people need a rand-denominated JSE-issued AMC. Most AMCs are offshore strategies. Even in the institutional space, for South African banks, many view it as too early for them to have their own AMC solutions, so some would rather tap into us as a third-party provider.
Our business is driven by the needs of our clients and their investors. With that in mind, we have worked extensively with the Cape Town Stock Exchange, A2X, and related partners, to create an instrument in which South Africa becomes the secondary listing – basically, a feeder into offshore issuance. For this to work it has to be fully functional and cost-effective.