European Funds Comment: How to Raise Money in Europe in 2020 and Beyond

15 November 2019

At a seminar this week in New York, our European funds regulatory team reviewed the key legal and regulatory issues for private fund managers wishing to raise capital from European investors in the years ahead. Europe’s institutional investors have had a strong appetite for private funds recently, and the challenges of accessing them are certainly manageable – but it pays to anticipate investor and regulatory requirements, and to build those in to the marketing strategy and structuring discussions.

Fund managers that are located in Europe will be well aware that the Alternative Investment Fund Managers Directive (AIFMD) offers both a significant compliance burden and a marketing benefit. EU-based managers that are within its scope – essentially those that have assets under management above €100 million, or €500 million if the fund is unleveraged and does not offer redemptions – will have no choice: they have to accept the burden, and will then be in a position to market to professional investors across all EU member states (and the three non-EU countries that are members of the European Economic Area). That marketing “passport” has value, but it certainly comes at a price.

Firms that are outside the AIFMD’s scope – either because they are not large enough or because they are not in the EU – should consider whether they want to voluntarily pay that price in order to attain the passport’s benefit. Below-threshold European firms can opt in, while non-EU firms can choose to establish a European affiliate, register that as an Alternative Investment Fund Manager (AIFM), comply in full with the AIFMD’s extensive rulebook, use an EU structure as their fund vehicle – which can be act as the main fund, or invest in parallel with it – and take advantage of the passport.

As we explained at our seminar, that price is too high for many non-EU managers. Unless they have multiple strategies and European-based teams, establishing an AIFM of their own is usually not worthwhile. But there is another viable route to the passport: to use a service provider to act as the fund’s AIFM. That still requires an EU fund vehicle (usually an unregulated Luxembourg limited partnership, although other options are available), and the host AIFM will either delegate investment management to, or take advice from, the sponsor. These so-called “host” AIFMs are tried and tested, offer a faster route to market, and investors are generally comfortable with them. There are additional costs, of course, but those are usually not prohibitive.

Having an AIFMD-compliant European structure carries some further advantages. Many regulated European investors – particularly insurance companies, and to some extent pension funds – will have a preference for EU structures (sometimes as a matter of internal policy, sometimes reflective of specific requirements in EU law). In the case of insurers, for example, they are likely to benefit from reduced capital reserves if they invest in an EU fund (although in fact that treatment is only contingent on the fund vehicle being in the EU, not the manager as well). And, in some European countries, including Denmark, Finland, Germany and Sweden, the marketing passport also gives access to certain experienced individual investors who do not otherwise qualify as professional investors.

Non-EU fund managers who do not want to step in to full AIFMD compliance or hire a host manager have a further marketing option: most European countries offer a private placement regime. Unfortunately, these regimes vary in scope and often impose additional requirements. Moreover, some important countries, like France, do not operate a useable private placement regime at all – although France does have some valuable exemptions for marketing to funds of fund and portfolio managers. But, if a manager only wishes to access investors in certain identified countries, and those are in countries with a manageable regime – such as the UK and the Netherlands – then private placement may be the best option. It is not, however, a cost-free option. As well as annual fees, some aspects of AIFMD compliance are still required, including ongoing reporting and compliance with the so-called “anti-asset stripping” provisions that apply upon the acquisition of control investments in larger EU-based portfolio companies. These are basically the same ongoing requirements that would be applicable to a sponsor that sets up an EU structure with a host AIFM, so the costs and benefits do need to be weighed against the available alternatives.

EU-based sub-threshold firms may be able to qualify as venture capital fund managers and access an alternative passport that way. If not, they have to fall back on their own, separate private placement regimes, but these are also not universally available.

Of course, Brexit complicates this planning because the UK – although still an EU member state at the moment – may soon leave the EU. Until the Brexit referendum in 2016, the UK was a natural choice of jurisdiction for many international sponsors wishing to adopt an EU structure. That is no longer the case. If and when the UK leaves the EU (and when any transitional period expires), UK-based firms are very likely to be in a similar position to those outside the EU – and UK-based managers, including the affiliates of international firms, will need to reconsider how they access EU-based investors.

In our wide-ranging seminar, we also looked at impending rule changes in the EU on “pre-marketing”, which regulate how much can be said to prospective investors before a marketing passport or private placement registration is required. A new pan-EU definition will liberalise that regime from August 2021 and harmonise the varying approaches among EU member states. That will be welcome and will make it easier to “test the water” for a fund strategy before going through the registration process. We also reviewed another important regulatory change that is due in 2021: the EU’s new rules on Environmental, Social and Governance (ESG) disclosures. An integral part of the EU’s attempts to meet its commitments under the Paris Agreement on climate change, these new rules will raise the bar for many managers – including those that currently make no or minimal commitments to investors about such matters.

Fundraising is never easy, and investor due diligence and negotiations over detailed terms are time-consuming and intensive. Raising money from European investors poses some particular challenges, especially for those that are approaching the European market from outside, and early preparation pays off. But the challenges are far from insurmountable and the benefits potentially significant.


The materials from our seminar are available on our website. Please click here to access them.