Offshore GPs find value in reverse solicitation

Having investors taking the lead on fund opportunities may prove to be a viable marketing strategy in Europe, some legal sources believe.

Offshore fund managers marketing in Europe will be able to bypass the Alternative Investment Fund Managers Directive (AIFMD) by accepting commitments from investors who are the ones to initiate contact.

Some offshore legal experts believe that marketing via this route, known as reverse solicitation, will be common with fund managers outside of the EU.

“In the UK you should be entitled to rely on a statement from the investor that they have come to you and not the other way round; that is a fairly solid and reliable approach the industry can work with,” said Ben Morgan, corporate partner at offshore law firm Carey Olsen.

The strategy may especially bode well for private equity firms raising repeat funds that capture interest from existing investors.

Market sources also mentioned that terms are heavily negotiated with investors prior to a final private placement memorandum (PPM) being produced, meaning “most conversations with investors pre-date anything that might constitute ‘marketing’ under the directive,” adds Morgan.

One Guernsey-based lawyer said he expects to see a change in the terminology of fund documents to formalize the process. “We will start to see offering documentation and subscriptions signed by investors when there hasn’t been any active marketing. There will also be investor statements saying they have sought this information at their own initiative.”

However, using reverse solicitation was originally thought to carry significant risk. Guidance from UK securities regulator the Financial Conduct Authority (FCA) suggested that reverse solicitation was only permitted when an LP initiated contact regarding a potential commitment, had no previous relationship with the GP, and had not learned about the fund from what was made publicly available on a website.

But the FCA toned down this approach and more recent guidance said the FCA would accept written confirmation from an investor as proof the commitment was made at the LP's initiative.

Some in the industry are concerned not all national regulators will adopt the FCA’s approach.

“Other jurisdictions are likely to make it [the reverse solicitation test] more difficult to satisfy,” said one Guernsey-based funds lawyer.

Regulators are not the only legal risk for fund managers relying on reverse solicitation for commitments. One fund lawyer said dissatisfied investors could also present a legal challenge, making the case that they were sold securities from a GP who didn't have the proper approvals to accept commitments.