Non-EU fund managers marketing in Europe may be able to bypass the onerous Alternative Investment Fund Managers Directive (AIFMD) by accepting commitments from investors who are the ones to initiate contact.
Some legal experts believe that marketing via this route, known as reverse solicitation, will be common with fund managers outside of the EU. If proven, the strategy makes it easier for GPs domiciled offshore to access EU investors in a post-AIFMD world.
“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,” says 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.
However, in order for firms to successfully use this method of marketing they will need very strong procedures and controls that are policed diligently, warned Bill Prew of Indos Group, a specialist AIFMD consultancy, during a recent webinar addressing the topic.
Prew advises GPs relying on reverse solicitation to monitor how each EU member state enforces its private placement regimes. Each regime determines how private securities can be sold to investors in that particular country, for instance what reporting or registration requirements a GP must complete before marketing can begin.
Market sources also note 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 says 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 has toned down this approach. Recent guidance from the FCA said the regulator would accept written confirmation from an investor as proof a commitment was made at a LP’s initiative.
Nonetheless there still exists ambiguity around what exactly constitutes marketing in the UK for purposes of the directive. “The FCA’s approach implies that initial exploratory discussions with an investor with preliminary marketing material may not constitute ‘marketing’, but at the same time such initial discussions may constitute ‘marketing’ if they include documents or statements that make clear that there are fund units or shares that the investor is invited to invest in,” explained in a recent client memo Sidley Austin lawyers Leonard Ng and Barry Breen.
This raises questions about whether a GP can hold generic discussions with investors and then claim that any actual marketing (like sending the PPM) only took place at the investor’s request, the memo stated.
More uncertainty stems from how national regulators across the EU will approach reverse solicitation, with many predicting that certain EU states will adopt a framework stricter than the one in the UK.
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. However, considering the requirements of the AIFMD, that may prove a risk worth taking for some GPs.