The role can be performed in-house or by an independent third party.
The core role of a depositary is to act as an independent overseer, ensuring the AIFM (manager) and administrator perform their duties correctly and ensure the proper governance frameworks are in order. This independence is compromised if the depositary function were performed internally.
In the alternative funds industry, a separate and independent depositary is the norm due to the importance of impartiality.
Having the depositary function in-house alongside the administrator could create conflicts of interest. It would be difficult to ensure the depositary is objectively monitoring the administrator's activities.
While having an internal depositary might streamline information flow, the potential loss of independence outweighs this benefit.
Any depository should have experienced, knowledgeable teams who have a deep knowledge of the asset class, the role and actions of the depository should not infringe on the day-to-day business of the AIF or AIFM. And if anything should be flexible to fit around the manager's day-to-day, adapting its processes to meet the individual processes of the client.