Private managers navigate diverse European marketing rules

European institutional investors are an important target market for private capital managers. However, distributing alternative investment products into this part of the world isn’t always straightforward for third-country managers. Regulation around fund marketing can vary across Europe—and even among European Union (EU) member states.

This is an issue that private capital firms need to be aware of when raising money in Europe as Nils Mordt, Head of Client Coverage for the UK at RBC Investor & Treasury Services, discusses.

1. Selling into the UK and Switzerland: An easing of certain rules

Both the UK and Switzerland—two countries that reside outside the EU—have an abundance of deep-pocketed institutional investors. Compared to the EU, they also provide less onerous regulation for foreign private capital managers to distribute their funds.

In the UK, most foreign managers sell to investors through private placement. A number of EU alternative investment funds (AIFs) have availed themselves of the Temporary Permissions Regime (TPR), which allows them to freely market to investors for a limited period following the Brexit transition. However, firms can only leverage the TPR if they notified the Financial Conduct Authority (FCA) prior to December 2020.

The UK and Switzerland provide less onerous regulation for foreign private capital managers to distribute their funds

The rules in Switzerland have also become more accommodative for private capital managers. For instance, local regulators recently announced that it is no longer necessary for foreign private capital managers to appoint a paying agent when distributing into the country—provided they are only selling to institutional clients, excluding family offices and high net worth investors.

According to Mordt, “The UK is a flexible market, which is why private capital funds are looking to raise money from the country's investors.” He adds: “Switzerland has also eased some of its rules, encouraging private capital managers to distribute into the country and creating a more readily available universe of investment strategies for their institutional investors.”

2. Selling into the EU: Large and diverse but more complicated 

While the EU is a more complicated market for third-country managers to access, it boasts a large and diverse investor community, including attractive fund domiciles like Luxembourg and Ireland.

There are generally two ways for third-country managers to access EU investors under the Alternative Investment Fund Managers Directive (AIFMD), both of which create certain challenges for private fund managers.

a. National Private Placement Regime

The first route, the National Private Placement Regime (NPPR), applies to EU-based managers with non-EU AIFs, or non-EU managers with EU AIFs.

NPPR does not permit managers to distribute their funds on a pan-EU basis, but rather enables them to sell into a handful of markets—on the condition that they have registered with the relevant national authorities. The NPPR is useful for private capital managers who might only want to access investors in one or two select EU markets, versus all 27 member states.

The NPPR is useful for private capital managers who might only want to access investors in one or two select EU markets

NPPR does come at a cost, obliging managers to become authorized in each country where they are marketing. This is likely to require managers to hire local legal counsel on a country-by-country basis, as the NPPR rules can differ substantially across member states.

“If leveraging the NPPR, private capital managers need to familiarize themselves with the domestic regulatory requirements in the EU member states which they are selling into. In certain markets, registration and other regulatory documents are in the local language, and this can create inefficiencies,” comments Mordt.

b. The AIFMD passport

The pan-EU AIFMD passport is perhaps the most comprehensive marketing tool available to managers. In marked contrast to the NPPR, the AIFMD passport enables managers to distribute their funds across all 27 EU member states without any meaningful barriers or restrictions. However, the passport is only available to EU-based managers running EU AIFs, and both manager and fund must be located physically onshore within the EU to take full advantage of the passport.

The AIFMD passport enables managers to distribute their funds across all 27 EU member states

In some instances, it may not be economical for managers to establish an office inside the EU, especially if they are small or only looking to raise a limited amount of EU money. Nonetheless, there are ways for managers to utilize the passport without incurring significant costs, says Mordt.

“We are seeing third-country fund managers appoint AIFMD or UCITS management companies (ManCos), whereby the ManCos in EU markets such as Ireland, Luxembourg or Malta will delegate risk and investment management to a third-country fund manager, allowing them to freely market into the EU, says Mordt.

“This is a cost-effective way for private capital firms to develop a distribution footprint inside the EU," he continues.

3. Pre-marketing into the EU: Know the new requirements

Recent EU legislation designed to simplify the rules around fund marketing has actually tended to make the process more complicated. This is something that private capital firms need to closely monitor.

The EU's new cross-border distribution legislation is designed to harmonize the precise definition of what counts as “pre-marketing” in relation to AIFMs. This comes following concerns that different member states have different interpretations of what constitutes pre-marketing.

Under the new rules, managers can share fund documentation with potential clients without needing to register for marketing under AIFMD.1 However, the provisions only apply to authorized EU AIFMs. “This leaves the door open for individual EU member states to determine whether equivalent rules should apply to non-EU AIFMs,” says Mordt. “Similarly, it is unclear how the rules apply to new managers who may want to conduct market testing before getting fully authorized as an AIFM."2

Third-country managers are encouraged to exercise caution in undertaking discussions with prospective EU investor

There are a number of well-trodden paths for third-country private capital managers to access pools of money originating in EU member states or third countries. Based on the evolving landscape, managers are encouraged to exercise caution in undertaking discussions with prospective EU investors.

“As non-EU managers look to establish an efficient process that drives investor flows and builds long-term relationships with EU investors, it is essential that managers familiarize themselves with how different countries are interpreting the pre-marketing rules,” Mordt concludes.

Marketing into Europe can be a complicated exercise as the rules tend to vary across different countries. Even within a harmonized landscape such as the EU, marketing requirements can diverge at a member state level. This is something third-country managers need to be mindful of when developing their European marketing strategies.

You may also like