The 2007-08 financial crisis has prompted European politicians to rethink how asset managers should operate in the European Union (EU). The result is a new piece of regulation, the Alternative Investment Fund Managers Directive (AIFMD), which is now in force in all 28 Member States of the EU. This legislation affects all European asset managers that were not already regulated under the mutual funds directive (UCITS), and applies to the management of hedge funds, real estate, private equity, debt funds, and others. But it also impacts the way non-EU asset managers can raise capital using their non-EU funds.
With these changes underfoot, doing nothing is not an option if you want to continue to raise capital in Europe. This guide is meant to help non-EU managers navigate the new rules currently being implemented by listing several options that may provide an avenue to EU investors.
Option 1: a country-by-country strategy
Before the AIFMD was introduced, non-EU-based asset managers wishing to sell their investment products to European investors had to comply with different rules in each EU country. These rules, called national private placement regimes (or NPPRs), varied sharply from country to country, requiring asset managers to be strategic when mapping their pathway into Europe.
Post-AIFMD, and at least until 2018, individual EU countries can still maintain their national rules—but managers will simultaneously need to comply with the AIFMD’s registration rules and transparency requirements (i.e. filing annual reports, disclosing sale information ahead of the sale, reporting to various regulators, and complying with major holdings and control requirements). As NPPRs are still in effect, and still not harmonized at the EU-level, managers currently need a country-by-country approach.
In the short term, this option might suit managers that have no, or only a limited, physical presence in Europe, and who seek access to only a few EU countries.
Option 2: partner with an existing manager in the EU
Depending on your strategy, observing each country’s NPPR might prove costlier and more time-consuming than making a contract with a European alternative investment fund manager who possesses a so-called European marketing passport. European managers in full compliance with the AIFMD’s legal requirements benefit from the right to easily distribute their funds to institutional investors in all EU countries.
Thus, this route is advantageous for non-EU asset managers since their local EU partner can take care of complying with European law, which makes distributing investment products in Europe very easy since only one registration and reporting process is needed. Going the NPPR route, on the other hand, could require several processes.
In the medium term, this option might be best for managers seeking access to multiple or even all EU countries without having to personally worry about the full set of legal requirements.
Option 3: Create your own manager (AIFM)
Depending on the extent of EU activity you’re looking for, setting up a permanent presence in a European fund domicile could be the optimal choice. Some EU countries provide a vast network of service providers, human resources, and favorable legal environments for management company domiciliation.
Via this route, the manager’s non-EU headquarters could keep the overall influence on the group, while the new company in Europe would be created to fully comply with the AIFMD. The new company could also, of course, obtain a marketing and a management passport. Whereas the marketing passport gives easy access to EU countries, the management passport lets so-called authorized alternative investment managers additionally benefit from the diversity of fund vehicles across the EU—all under one roof.
Consequently, this option might be best in the long run for managers looking for a permanent EU presence.
Not so fast
Many still believe that “reverse solicitation,” i.e. passive marketing (whereby the manager claims that it is the investor who initiated the transaction), is a reliable strategy for accessing EU investors, because it is outside the AIFMD’s scope. However, European regulators have diverging interpretations of the terms “marketing” and “reverse solicitation,” and gaining EU investors with this strategy could lead to accusations from regulators (or unhappy investors) of being in breach of European law. It is therefore not an option that KPMG can recommend.
The implementation of the AIFMD is still a work in progress. It is foreseen that some non-EU jurisdictions could be eligible for the marketing passport as early as this year, but for the moment only Guernsey and Jersey are being seriously considered for this option. It is also foreseen that the NPPRs could be discontinued by 2018, meaning that Option 1 presented above would disappear.
KPMG provides a broad range of services that can assist with any of the three options described above: click here for more information. To read up on the evolution of the AIFMD and its impact outside the EU, please visit this page.
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