For many, the marketing regime for funds in Europe is a confusing mix of pan-European and country-specific rules.
Lawmakers have reacted by proposing a package of measures designed to remove regulatory barriers, making distribution simpler, quicker and cheaper and, notwithstanding some initial missteps, the most recent “compromise” proposals” signal a rather more satisfactory direction of travel.
Inevitably, Brexit – and, in particular, the unresolved issue of market access for managers and funds established in the UK – further complicates the picture.
Against this backdrop, we have produced our quick start guide to marketing alternative investment funds in Europe in attempt to make some sense of it all.
Although the guide is principally aimed at US managers, we hope it will assist any non-European manager in navigating unfamiliar terrain.View Guide Now
O say does that
Startling new structure yet waive
Our recourse to treat our carry
As capital gains?
...And That Governance Of The Funds by The Management Company For The Ultimate Beneficiaries Shall Not Perish From The Earth.
Adapted from Abraham Lincoln
The Secretary of State of the United States of America hereby requests all whom it may concern to permit the United States fund manager named herein to pass without delay or hindrance and in case of need to give all lawful aid and protection.
Le Secrétaire d’État des États-Unis d’Amérique prie par la présente toutes autorités compétentes de laisser passer le gestionnaire de fonds américain titulaire du présent passeport, sans délai ni difficulté et, en cas de besoin, de lui accorder toute aide et protection légitimes.
El secretario de estado de los Estados Unidos de América, por medio de la presente solicita a quien corresponda, le permita al administrador de fondos de los Estados Unidos de América, nombrado en este documento, el paso sin demora ni dificultades, y en caso de ser necesario, brindarle toda la ayuda y protección lícitas.
FOR MANY US FUND MANAGERS, THE RULES GOVERNING THE RAISING OF CAPITAL IN
EUROPE ARE OPAQUE.
The marketing regime for funds, supposedly harmonized in recent years, is a sometimes confusing mix of pan-European and country-specific rules.
THERE ARE MANY TRAPS FOR THE UNWARY.
This brief guide charts the European regulatory landscape, with the aim of aiding US managers as they seek to navigate unfamiliar terrain.
The content of this document is general in nature and is not intended to contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
1 "Europe" for the purposes of this guide means the European Economic Area (EEA) – the 28 member states of the European Union, plus Norway, Iceland and Liechtenstein. Switzerland is outside of the EEA and is not within the scope of AIFMD. The distribution of funds to Swiss investors is governed by local requirements and is not covered by this guide.
THE EUROPEAN REGULATORY LANDSCAPE
AIFMD: The marketing by US managers of private equity, hedge, real estate and other alternative investment funds (AIFs) in Europe is governed by the alternative investment fund managers directive (AIFMD or the Directive).
AIFMD purports to create a harmonised regulatory framework for the management and marketing
of AIFs and is the most significant piece of European legislation affecting the fund
AIFMD contemplates that AIFs may be marketed in Europe via either:
FUNDRAISING IN EUROPE: OPTIONS FOR US MANAGERS
As such, US managers wishing to actively market in Europe broadly have two options:
Marketing – ‘Marketing’ for the purposes of AIFMD means an “offering or placement of units or shares at the initiative of the AIFM or on behalf of the AIFM.” This definition is particular to AIFMD and does not have its ‘ordinary’ meaning. Consequently, it has been construed and applied inconsistently across Europe. Generally, AIFs may only be marketed to professional investors.
Pre-marketing – In practical terms, many managers have been able to conduct ‘pre-marketing’ activities (such as investor meetings and the provision of draft documentation) without triggering compliance with registration requirements. However, care is needed here as a number of European jurisdictions construe any promotional activities intended to attract new investors as marketing for the purposes of AIFMD.
Care must also be taken to comply with any pre-existing non-AIFMD marketing regimes, such as the UK’s financial promotion regime.
US-based managers are not (yet) able to take advantage of the AIFMD marketing passport. However, the Directive permits individual member states to allow the active marketing of funds by US managers in that member state’s discretion, subject to the fulfilment of the Baseline Requirements, plus any additional jurisdiction-specific requirements. These are referred to collectively as ‘national private placement regimes’ “NPPR”.
The Baseline Requirements2 for the member states choosing to permit private placement by US managers are that:
In certain jurisdictions (notably, the UK), the NPPR requires simply that the US manager complete certain filing formalities (submission of a notification of intention to market and payment of any fees) and undertakes to comply with the Baseline Requirements.
Other member states have ‘gold-plated’ the Directive - only allowing the practice subject to specific (often onerous) local rules.
For example, Germany, amongst other things, requires US managers privately placing AIF to appoint a depositary to carry on certain functions. Finally, as a consequence of implementing AIFMD, certain member states (notably France) have banned private placement altogether meaning that, from a practical perspective, US managers can only distribute products in such jurisdictions on the basis of reverse inquiries (which concept is itself interpreted restrictively - see page 22). Advice must be taken on a jurisdiction by jurisdiction basis to ensure compliance with local requirements regarding the distribution of AIFs.
Note that AIFMD contemplates that NPPR may eventually be phased out – meaning that US managers would need to be authorised by European regulators to market in Europe.
2 The Baseline Requirements also mandate that certain co-operation arrangements are in place between US authorities and the authorities in each member state in which funds are marketed. They also require that the US is not listed as a Non-Cooperative Country by FATF. Happily, the US currently meets both of these conditions!
Private placement is likely to make sense for those US managers whose European prospects are based exclusively in the UK or in other “straightforward” European jurisdictions (such as the Netherlands). It allows the manager to carry on with its existing infrastructure and will subject it to less onerous regulatory obligations.
For US managers seeking the maximum possible exposure to European capital (including in jurisdictions where, in practical terms, private placement may be subject to onerous conditions (Germany) or impossible (France, Italy, Spain)) a solution which allows them to take advantage of the AIFMD’s marketing passport may make most sense.
This might involve establishing a European AIFM or employing a hosting solution.
A US manager might consider establishing a European AIFM, which would allow it to take advantage of the benefits conferred by the AIFMD marketing passport. These benefits do come at a cost, however: full AIFMD compliance. Full compliance with AIFMD includes:
Establishing a European AIFM would provide a US manager with unfettered access to European investors through the AIFMD marketing passport. It would also give the manager complete discretion over portfolio management, risk management, marketing and operational decisions. The European AIFM could take investment advice from, or delegate certain portfolio management functions, to its US parent or affiliates in other geographies.
Certain compliance and other functions can also be delegated to local service providers as necessary, leaving the manager to do what it does best – managing money.
Two example structures are shown on pages 16 and 17.
Who should use a European AIFM?
The European AIFM solution may make sense for larger asset management groups with the ability to expand their existing infrastructure into Europe.
Setting up a fund management business in Europe will be onerous and expensive. Consequently, few US managers will have the appetite for establishing a European AIFM.
There is, however, another way: the Host AIFM solution.
Service providers (themselves authorised as AIFMs), such as MJ Hudson Fund Management Services (see page 26), will agree to act as a fund’s AIFM for a fee. Host AIFMs will typically undertake risk management (and other administrative and compliance functions) for the fund and delegate day-to-day portfolio management to the US manager.
For less actively managed funds, the Host AIFM may also act as the portfolio manager and look to the US manager for investment advice.
Like the European AIFM, the Host AIFM would allow the US manager unfettered access to European investors through the AIFMD marketing passport. Importantly for US managers, however, it avoids onerous operational requirements and overheads, leaving the manager to do what it does best – managing money.
Example structures are shown on pages 20 and 21.
Who should use a Hosting Solution?
Any US manager looking for maximum exposure to European investors, but who is not (currently) inclined to establish its own European presence.
For those US managers who are considering establishing a European AIFM, the Host AIFM solution can also act as an interim measure – to allow the manager to get to market – whilst its European infrastructure is established.
Reverse solicitations fall outside the scope of the AIFMD marketing rules. As such, US managers are not required to comply with AIFMD in circumstances where investors invest ‘at their own initiative’. However, the precise scope of the reverse solicitation exemption is not certain and may be interpreted and applied inconsistently across EEA member states. The absence of definitive regulatory guidance further muddies the waters. It is clear that an entirely unsolicited approach by an investor ought to amount to a reverse solicitation. However, the facts are rarely that clear cut.
Whilst reverse solicitation is an option for US managers, we could not recommend relying on a marketing strategy based on that exemption. Getting this wrong could expose managers to regulatory proceedings and/or rescission claims from investors. Accordingly, any reliance on this exemption must be supported by a robust fact pattern and audit trail.
The best route to marketing a fund in Europe will depend on the specific charactersiticts and requirements of the manager and the investors it is trying to attract. The main considerations are set out on the following pages.
Whichever route is most appropriate, MJ Hudson’s team of legal, fund management and marketing professionals can advise and support throughout.
MJ Hudson’s solution
MJ Hudson is regulated as a EU fund manager in the UK and Luxembourg. We can therefore provide a dedicated European platform with substance on the ground, which satisfies the needs of EU and UK regulators. Our European platform also provides access to a network of like-minded GPs and LPs.
Regardless of the structure and jurisdiction you choose, we can provide a partial or completely outsourced model, covering everything you need to be compliant and successful in the UK and continental Europe, including risk management, marketing and legal advice, and LP and regulatory reporting.
Typically, we create a small office for you in our City of London headquarters, which we grant appointed representative (“AR”) status, allowing you to benefit from our UK regulatory permissions. This office then advises a UK or Luxembourg fund sitting as a parallel to your main fund if you are based outside of Europe. A Guernsey GP is sometimes added for structuring purposes.
MJ Hudson’s team of legal, tax, marketing and operations experts can support you in many ways as you look to raise capital in Europe. Visit MJHudson.com/USinEU for more information or speak to your normal MJ Hudson representative.
Receive a hard copy of the MJ Hudson Passport – Marketing Alternative Investment Funds in Europe. A quick start guide for managers from the USA.