Managers hoping to establish an operational wing within the EU have three options, said panelists at this year’s Digi Pulse USA event from the Association of the Luxembourg Fund Industry.
Panelists walked listeners through the various implications for US managers hoping to establish operations and target investors in Europe while complying with the Alternative Investment Fund Managers Directive.
First, the panelists said, when branching out into Europe, managers have to have a clear idea of what exactly their investors expect of them, and if the goal is to attract EU investors, have a clear idea of who and where the target investor would be.
Laurent Capolaghi, PE partner at EY, said: “I would just like to remind everyone how important it is to actually understand what the expectations are from your investors and [who] are the investors that you want to target.”
US managers should expect a heightened level of due diligence in dealing with new European investors, as many expect a particular level of governance and overall function outside of the pure regulatory requirements, said Capolaghi.
Passporting/parallel fund option
“[Passporting] is obviously the safest route and kind of the golden route, I would say, to tap into European money,” Capolaghi said.
This route allows a US manager to establish their own fund manager, or AIFM, in Luxembourg or another EU member state and manage the Luxembourg-domiciled fund from there.
The manager could also nominate an authorized third-party AIFM to act on their behalf in Luxembourg, which would change the costs associated with establishing the European manager.
Should managers decide to go with a third-party AIFM, Capolaghi said: “You’re really shifting from a fixed-cost model, if you create your own AIFM … to a variable cost model.”
Establishing your own manager or hiring a third-party AIFM then grants the manager a “passport” to market to investors in any of the 27 EU member states.
For funds domiciled in Cayman, Delaware, or other jurisdictions, establishing a feeder fund is an option, but such structures don’t gain the benefit of the marketing passport.
“It has been specifically addressed by the EU regulator that you would lose the benefit of the marketing passport, if you have an EU feeder feeding into a non-EU master [fund],” said Christian Hertz, general counsel and managing director at LIS Sanne, a third-party AIFM.
But GPs could establish an EU parallel structure that mimics the investment decisions of the main fund.
“So you set up your European fund, but instead of investing in the main fund, you will invest in parallel with the main fund directly in the target assets or in SPVs set up in order to acquire the target assets,” said Hertz.
In this case, however, a manager wouldn’t be able to appoint its US manager to the EU parallel fund. In order to keep the benefits of the AIFMD regime, the manager has to appoint a licensed EU AIFM.
“Your licensed EU AIFM would then appoint the US manager, either as portfolio manager with delegation of investment and divestment decisions, or as investment advisor, where you would provide the EU AIFM investment recommendations when you have an investment or divestment decision to be made,” said Hertz.
National private placement regime
Under the National Private Placement Regime, a provision of AIFMD, a US manager could market in Europe without securing a certified AIFM or marketing passport, but it would need to be approved by the individual European jurisdiction they’d hope to target.
“The level of expectation from each member state’s regulator would vary, so it’s on a case by case basis,” Capolaghi said.
This approach makes the most sense from a cost perspective for US managers hoping to focus fundraising or operational efforts on one jurisdiction within the EU, panelists agreed.
Finally, managers may still also access the EU when investors come to them first, rather than as a result of marketing efforts; a process known as reverse solicitation – though EU regulators are currently looking into options to curb those using reverse solicitation and the NPPR in upcoming regulation Capolaghi said.
Nonetheless, reverse solicitation may still be applicable for managers with existing relationships to investors from a previous vintage fund, he added.