10th May 2016
As 2016 progresses, ESMA continues to weigh up the possibility of extending marketing passport rights under the AIFMD to certain non-EU countries, including the US. However, despite murmurings, it remains our view that the widening of the marketing system across the Atlantic (and to parts of Asia) remains open to question and is likely to be several years away.
US managers considering marketing to EU investors must therefore weigh up the three options currently open to them:
1. The National Private Placement Regime (NPPR) route: Applying to market in each jurisdiction individually. This approach can be administratively burdensome initially, but is currently the most cost effective and allows managers to retain total control over the fundraising process. This is the approach we see most non-EU managers taking and is now a relatively well trodden path for US managers wishing to attract European capital. Managers in Asia are also beginning to go down this route.
2. Appointing a host AIFM platform: An AIFM platform provides full regulatory responsibility for the fund and enables a manager to market across the EU under that host umbrella. Here, we see interest typically coming from smaller managers or those with less capacity to manage NPPR regulatory hurdles. Whilst using a host AIFM is not a cheap option, in the main, this group prefers to free up scarce internal human resources in order to concentrate on core activities of the firm. Whilst the least common option to date, there is an increasing interest from managers seeking a one-stop shop when it comes to marketing in Europe. An option which is increasingly understood by regulators and investors.
3. Establishing an EU-based office and applying for AIFM permissions directly. This option is being used by a minority of managers, but only those who can support the investment required.
Langham Hall has been acting as depositary for non-EU managers since 2014, and has been providing Annex IV reporting services since they were first required in 2015. In this way we work with managers who have taken each of the three options, but have particular experience supporting those who have taken the NPPR route.
Regardless of the route to market, the following observations may be of use to any non-EU managers contemplating Europe:
• “Depositary-lite” does not mean “less regulation”. There are three responsibilities a depositary has; cash monitoring, sake-keeping of assets and oversight of the fund and the manager. The “lite” in depositary-lite allows for these responsibilities to be provided by multiple providers, but all three need to be in place. To date we have not seen managers requesting anything less than all three services.
• Western and Northern Europe continue to be the two regions most commonly targeted. In our experience, it is the UK, Netherlands, Ireland, Luxembourg, Germany, Denmark Sweden and Finland from which investment is being sought.
• Of these jurisdictions, all (except the Netherlands for the time being) require Annex IV reports to be submitted and Denmark and Germany also require that a depositary-lite provider be appointed. Annex IV reporting applies once marketing is permitted. The depositary requirement is only effective at the point a Danish or German investor subscribes.
• Only one depositary-lite agreement is required. A single agreement with one provider will satisfy both the Danish and German regulators.
• Marketing in Denmark: Questions of clarity are raised by the regulator, but no one has yet experienced any problems actually getting permission to market their fund. Anecdotal evidence from our clients suggests that once gained, it is easier to fundraise in Denmark than in Germany. The time required to process the application is less than in Germany.
• Marketing in Germany: Though BaFin certainly asks questions about marketing applications, again here these are just questions concerning clarity. As is the case in Denmark, no manager has yet had any problems gaining permission to market in Germany. That said, BaFin has an additional requirement – if marketing a feeder fund, the master will also need to be included in a depositary agreement or otherwise proof shown that the depositary responsibilities are being provided by another party.
• Marketing in other jurisdictions: This has been very difficult to date, in particular in France, Italy and Spain where we have seen no managers marketing to date.
• Annex IV reporting: Challenge or feedback from regulators on returns submitted is yet to materialise, but will be coming. A less burdensome single submission of reports to ESMA is still a way off.
Whilst the current marketing approach under AIFMD has its downsides, an increasing number of non-EU managers are starting to successfully navigate their way to European capital. If you would like assistance mapping out the route that best suits you or if you would like further information on depositary, depositary-lite, Annex IV services or host AIFM platforms, please contact:
Joe Hime - Head of Depositary - email@example.com
Marie Fitzpatrick - Business Development Director - firstname.lastname@example.org