The legal background

Fund marketing throughout the EU and in the UK is principally governed by the Alternative Investment Fund Managers Directive (AIFMD). Under the AIFMD, a manager is not only liable for its own marketing activities but also for those of any third-party agent (e.g., any placement agent) it appoints. Depending on the circumstances, a breach of the marketing requirements could also provide investors with a rescission right. It is important to get this right.

Advantages of being fully European 

Where the fund (alternative investment fund or AIF) concerned is domiciled in the EU (Luxembourg tends to be the most popular jurisdiction) and is managed by an entity (AIFM) that is licensed under the EU’s AIFMD, the so-called marketing passport is available. Once the EU regulatory authority where that AIFM is based is notified of the AIFM’s intention to market in other EU jurisdictions, a wholly EU fund structure can be marketed in those jurisdictions in reliance on the passport without the need for the AIFM to take any further steps. 

To gain access to the marketing passport, some non-EU sponsors establish EU AIFs and appoint third-party EU AIFMs to manage those AIFs (some of the largest sponsors, such as Apollo or KKR, have set up their own in-house EU AIFMs). Clearly, any third-party EU AIFM that has been appointed will not be equipped to pursue the investment strategy of the AIF, and investors will expect this to be driven by the sponsor. The AIFMD permits an AIFM to delegate investment decision-making (i.e., portfolio management) to a non-EU firm, provided that firm holds a local license to engage in this activity (in the U.S. context, typically an SEC-registered investment advisor or an exempt reporting advisor). Where the non-EU firm does not hold such a license, it may be able to provide investment advice or recommendations to the AIFM for it to act upon. 

Creating an EU fund structure is relatively costly and is therefore typically only used where a sponsor expects significant interest from EU investors across a number of jurisdictions and consequently needs the ability to market the AIF freely.

Following Brexit, an EU AIF managed by an EU AIFM will need to be registered for marketing in the UK before it can be marketed to UK investors. Fortunately, as explained further in the next section, this process is very straightforward and can be achieved quickly with minimal expense.

Halfway house of national private placement

Where the sponsor does not want to invest the time and money to engage an EU AIFM or expects interest in only a few EU jurisdictions and/or reverse solicitation is unavailable, in most cases, it should be possible to register the AIF for marketing in those jurisdiction(s) that are of interest. This is achieved by registering the AIF under the applicable national private placement regime (NPPR). Note that this approach is not possible in certain EU jurisdictions, including Austria, France, Italy, and Spain.

The requirements of each jurisdiction’s NPPR vary, as does the time taken to register. For example, registration in Luxembourg and the UK can be achieved within a day and is effective on submission, whereas the process in Germany or the Scandinavian countries takes longer and is more involved, with positive approval from the local regulator being required before marketing can commence. Once the AIF has been successfully registered under NPPR, it can be marketed to professional investors in that jurisdiction freely.

Registration of an AIF via NPPR brings with it certain AIFMD-derived pre-contractual and ongoing compliance obligations (e.g., additional investor disclosure requirements (including regarding the AIF’s approach to ESG matters), submitting periodic reporting to the relevant regulator on the AIF’s activities for the period concerned) but these should not be overly burdensome and there are compliance consultants that can assist with the ongoing reporting at minimal cost.

Narrow reverse solicitation carve-out

There is a carve-out from the application of the AIFMD where a professional investor has contacted the sponsor or AIFM at its own exclusive initiative, requesting further information about an AIF in the market (or soon to be marketed). Whether reverse solicitation is available depends on the facts and circumstances, and it is clearly not available where the sponsor (or anyone acting on the sponsor’s behalf) has engaged in any pre-marketing or marketing of the AIF to that investor. It is intended to be a narrow exemption and should not be relied on unless the sponsor is able to evidence that reverse solicitation applies, with a proper paper trail recording the unsolicited approach from the relevant investor, and no evidence of facts or circumstances that could undermine this position. 

Need to be mindful of any pre-marketing requirements or restrictions

The EU has introduced a regime for pre-marketing (broadly defined as “the provision of information or communication…on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors…in order to test their interest in an AIF or a compartment which is not yet established, or which is established but not yet notified for marketing…and which does not amount to an offer or placement to the investor to invest in the units or shares of that AIF or compartment”). 

The implementation of this regime varies depending on the EU jurisdiction concerned, with some (including Denmark and Norway) banning any pre-marketing by a non-EU AIFM, or anyone on its behalf, entirely. Others require notification to the regulator before pre-marketing commences. There is no equivalent regime in the UK, where a fair amount of investor interaction is allowed before the requirement to register for marketing is triggered.

Before embarking on any pre-marketing in the EU, non-EU sponsors should ensure that they obtain legal advice to avoid tripping up and potentially attracting unwelcome regulatory attention or otherwise exposing themselves to risk.

Conclusion

While the fund marketing rules applicable throughout the EU and in the UK can appear daunting and complex, they are perfectly navigable in most circumstances. The right approach to navigating them will depend on the relevant circumstances.

We have a great deal of experience advising sponsors of all types and sizes on how best to access capital in the EU and the UK by suggesting tailored approaches aimed at minimizing risk. 

Please get in touch if you are contemplating a European fundraise or would like to hear more.