European Capital: Routes to Market for Non-EU Managers
Following a very challenging 2023, managers throughout the market are planning their fundraising strategy and timelines for 2024. Europe will be a key target for many. We are seeing a lot of interest already, including from managers who have never previously chosen to raise from Europe.
To summarise, for any non-EU manager looking to raise capital from Europe, there are only two routes in which you can “market” a fund in line with the prevailing AIFMD regulation. These are a) marketing a non-EU fund (typically Delaware) or b) marketing an EU fund (typically Luxembourg). This has been the position for 10 years. However, ahead of selecting either route, managers should strongly consider implementing a formal “pre-marketing” phase ahead of marketing. Since August 2021, pre-marketing in the EU now requires notification to regulators of the relevant country. By leveraging Langham Hall’s approval as a regulated AIFM in the EU, we can register for a pre-marketing campaign covering all EU countries. This is not possible for non-EU fund managers.
Hosted Pre-marketing is the fastest way to start speaking to investors. The chronology is as follows:
- Undertake pre-marketing;
- Undertake formal marketing by either:*
a. Marketing a non-EU fund via the National Private Placement Regimes (‘NPPR’) where accessible in that country; or
b. Marketing an EU domiciled fund via the EU marketing passport
*For structural reasons some managers may decide to use both options to maximise routes for bringing in European capital.
This approach is being used as a pathfinder to European LPs. It facilitates conversation with LPs throughout Europe allowing discussion and document sharing (drafts only), up to but short of, executable subscription documents. This can also be conducted for a “potential” EU fund i.e. before establishment, as part of a global fundraise. In this scenario, pre-marketing is conducted for a potential Lux fund as part of the decision making process to determine what level of EU LP interest exists. Once pre-marketing has been completed and LP interest quantified, the fund sponsor/manager can then elect the more appropriate route of the two set out above to circulate final fund documents and admit investors.
Hosted pre-marketing can be up and running in 2-4 weeks.
1. Marketing a non-EU fund via the National Private Placement Regime (NPPR)
Marketing via NPPR is still the preferred route to admit investors from the EU for the majority of non-EU managers. It has been used successfully for 10 years, though some managers are yet to explore this option. It allows targeted country by country marketing, and is the required regulatory step to bring European investors into a non-EU fund. Certain regulatory requirements are triggered by formal marketing, including annex IV reporting (similar to Form PF) and a depositary-lite service (triggered by investors in Germany and Denmark). We provide these services from our London office.
Timelines vary, but managers should factor in 1-3 months to identify jurisdictions and get marketing permissions in place. Because of this, careful sequencing of pre-marketing and marketing applications should be considered so not to delay investor commitments.
2. Marketing an EU fund using a marketing passport
This requires establishing a (typically) Lux parallel fund usually managed by a Lux host-AIFM, with Lux fund administration and depositary services. It is a viable option for anyone raising more than $300m from European investors. While introducing some operational complexity, this is the natural progression for those with sufficiently strong LP demand or strategic needs and opens the fund for (professional) investors throughout any EU country.
The timeline to establish a Lux fund and getting a formal marketing approval to circulate final Lux fund documents and accept investors is usually circa 2.5 months.
A note on reverse solicitation
Managers considering European fundraising should bear the following in mind. In an increasingly competitive fundraising environment, reverse solicitation is less predominant than it once was. Reverse solicitation does not constitute a marketing strategy, and is undertaken at the sole risk of the GP and manager if it should be proven later that it was not a genuine reverse solicitation from the investor. EU regulators are putting more scrutiny on reliance on reverse solicitation and IR teams and placement agents are at risk of being in breach of EU regulations for pre-marketing or marketing a fund without regulatory approvals/notifications. GCs and CCOs are wary of investor DDQs increasingly asking about exposure to reverse solicitated investors. Case law now exists in which a distributor has been prosecuted for marketing activities relying on reverse solicitation.
If you are considering any European fundraising at all, please contact either Hanny Tirta (firstname.lastname@example.org) or Joe Hime (email@example.com) and we can walk you through the details of premarketing, NPPR and establishing and operating a Lux fund.
For all US fund administration requirements, please contact Joseph Hindi (firstname.lastname@example.org) our Head of US, based in New York.