Europe has increasingly become an attractive fundraising location for non-EU fund sponsors looking to expand their investor reach. Many will consider setting up a European parallel fund to sit alongside their main fund. Operating in Europe means complying with the Alternative Investment Fund Managers Directive (‘AIFMD’), which comes with a number of operating requirements that some sponsors may not be familiar with.

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One such requirement we have increasingly discussed with non-EU sponsors is an obligation to comply with, and disclose remuneration figures to investors. This may sound alarming at first glance, but here we will dig into what this actually means in practice.

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Is your Luxembourg parallel fund in scope?

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EU Host Alternative Investment Fund Managers (‘AIFM’) have four core functions: portfolio management, risk management, valuation verification and general overall fiduciary duty in respect of the fund operations. With US fund sponsors who are Securities and Exchange Commission regulated, the portfolio management can be delegated. Delegation means the AIFM remains ultimately responsible but provides via a delegation agreement, a regulated third party with certain powers and responsibilities subject to oversight by the AIFM.

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While the delegated portfolio manager is now able to take investment and divestment decisions for the Luxembourg fund, it must also subject itself to compliance of the requirements under AIFMD, the primary legislation in the EU setting out the framework for managing a private markets fund. The legislation requires (amongst other matters) that the entities to which portfolio management have been delegated are subject to regulatory requirements on remuneration that are equally as effective as those applicable under the AIFMD.

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Remuneration is usually disclosed in the unaudited section of the accounts. Where the AIFM has delegated the portfolio management function, this will need to include the portfolio manager’s remuneration details as set out below.

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Remuneration information needs to be disclosed under the AIFM Directives

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The remuneration disclosure essentially consists of the headcount of the personnel involved in portfolio management activity, the total remuneration, the fixed remuneration and the variable remuneration.

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Since the portfolio management activity usually involves a larger group of people, the remuneration of single individuals is not identifiable for external parties. The methodology for calculation of the amount of fixed and variable remuneration for disclosure should be subject to a policy agreed upfront between the AIFM and the portfolio manager.

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ESMA Guidelines for staff remuneration disclosure

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The European Securities and Markets Authority (‘ESMA’) offers guidance on how to determine the relevant groups of staff (Identified Staff). Essentially, the remuneration shall include staff that have a material impact on risk profile of the AIFM and/or the AIF.

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This includes board managers and senior management of the AIFM, control functions (risk management, compliance, internal audit and similar functions), other risk takers and portfolio management or risk management activities that have been delegated by the AIFM.

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For portfolio managers, the identified staff refers to personnel that have a material impact on the Luxembourg fund’s risk profile.

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What are the challenges with the AIFMD Regulation?

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Remuneration disclosures appear to surprise non-EU portfolio managers when they are initially brought up. There is obviously no equivalent in markets outside of Europe where private funds can often operate with little to no regulatory disclosure requirements on this topic.

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While it might be easier to identify the relevant staff in the host AIFM entity, in large US organisations, there are often many teams that have direct or indirect impact on the risk profile of the Luxembourg fund. In addition, they usually dedicate only a small part of their time to the Luxembourg fund.

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Best practices to deal with this AIFMD Reporting requirement

• At the outset, non-EU fund sponsors using a EU Host AIFM should discuss what is required with their proposed AIFM and also Luxembourg legal counsel to determine the best way to comply with the reporting requirements. This can depend on the organisation and business of the non-EU portfolio manager.
• Set up policies and procedures during onboarding which have been agreed by the Luxembourg Counsel and EU Host AIFM.
• Discuss the audit process with your fund administrator, auditor and AIFM team in advance.
• Ensure calculations are based on rational analysis in accordance with the agreed policy and applied consistently.

At first glance, for non-EU sponsors that have not operated in Europe before, the requirement to disclose remuneration to investors may seem daunting. However, the practical reality of this issue is that remuneration is not required to be disclosed on a personal basis. We regularly discuss this, and other issues with sponsors looking to operate in Europe for the first time, and will gladly share our experience as required.

Langham Hall is committed to giving back to the communities in which it operates. We champion our staff to be involved in a variety of activities to widen their life experiences and perspectives.

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During the first half of 2024, our staff have undertaken a wide range of charity and fundraising activities, ranging from a team kickabout in support of Autism Jersey to taking on the Pretty Muddy obstacle course challenge in aid of Cancer Research UK.

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Check out what our teams have been up to:

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Guernsey

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Over the first quarter of the year Guernsey have taken part in a variety of charity and fundraising initiatives to continue to support Guernsey Alzheimer’s Association. During early June, staff took part in “The Saffery Rotary Walk” a 39-mile route following the coastline of Guernsey. The initiative raised money for 21 local charities including Guernsey Alzheimer’s Association, Autism Guernsey, Guernsey Chest and Heart LBG.

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A team of volunteers have also been contributing to the literacy programme for Bright Beginnings, a scheme dedicated to listening to children read once a week to help them develop their learning. The volunteering allows staff to take a break from a busy day to try something completely different, as well as give back to the community.

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In the second quarter of the year, Guernsey selected their ‘charity of the year’: The Sunflower Project, a support service for children and young people who are experiencing bereavement. The People Committee started the fundraising efforts with a bake sale raining £133. They will continue to coordinate other initiatives to raise additional funds for the charity.

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Jersey

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During July some of the Jersey team participated in the James Keating Football Charity Tournament in support of Autism Jersey. The team performed exceptionally well, especially considering it was their first time playing together. They displayed remarkable teamwork and determination, making it all the way to the semi-finals!

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We are proud to continue being a corporate partner for Dementia Jersey and are grateful to have been invited to attend their Government House afternoon tea event in June. We donated a Relish hamper to the raffle to support the event.

As an ongoing partner of Dementia Jersey, the team are continually exploring ways to support their important work. Recently, they had the pleasure of hosting members of the Dementia Jersey team at the office for an enlightening seminar on the daily operations of the charity. In a show of support the Jersey office donned their purple and raised £157 in donations.

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London

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In early June some volunteers from the London office took part in the Pretty Muddy 5k challenge in aid of Cancer Research UK. The team raised over £1500 and had great fun getting muddy for a good cause.

The office also made donations on behalf of the business and staff.

• Donations to The Girl’s Network whose mission is to inspire and empower girls from disadvantaged backgrounds
• Support for families fleeing conflict in Sudan
• Donations to the Neonatal Unit at St George’s Hospital, Tooting
• Donations to the Pretty Muddy Langham Hall Group
• Donations to the Mind Out for Pride Month

We also encourage our staff across all jurisdictions to take on their own challenges and initiatives.

• Ben Ramsey from London took part in the Brighton Marathon raising funds for Samual’s Promise
• Ashley Dunkley from London took part in the 8,000 steps a day challenge during the month of March, in aid of Tommy’s.

We look forward to all the different initiatives the teams have planned for the rest of 2024.

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We are proud to stand together and extend a helping hand to those in need.

Richard James has been appointed as Head of UK, bringing over 20 years’ experience in investment management to Langham Hall.

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Previously Richard was Global CFO for Savills Investment Management, a global fund manager investing in Real Assets and Credit. Here he was responsible for both fund and corporate finance, tax, treasury and operations across the business. During his tenure, he was part of the leadership team that drove AUM growth from £3bn to over £20bn. Before Savills Investment Management, Richard worked at Internos, AEW, and Ares. He began his career at EY, where he also obtained his professional qualification. Richard’s invaluable client-side experience and proven leadership make him a significant asset to Langham Hall.

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Richard James, Head of UK said: “I am very excited to be joining such a highly respected business which is becoming increasingly unique in this market”

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Rob Short, Managing Partner said: “I am delighted that Richard has joined us to continue to deliver best-in-class professional services to our clients”

Following a prolonged period of difficult fundraising conditions, many GPs we speak to are planning to be back in the market during Q4 2024 / Q1 2025. As we have observed over recent years, Europe will be increasingly important for many. Some are familiar with AIFMD and how to navigate the requirements which govern marketing to institutional investors in Europe; others are considering Europe for the first time. We have set out below a brief summary of the key questions and considerations.

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1. Isn’t fundraising in Europe difficult?

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AIFMD, the regulation which governs marketing in Europe, has now been in place for over a decade. Whilst not without some complexity, the reality is that marketing private funds in Europe is more straightforward than many first fear. Regulatory fund counsel take care of all the registrations, and service providers pick up most of the operational lift. The ability to pre-market also makes marketing efforts more focussed than in the past.

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2. What are the options?

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There are two – marketing a non-EU fund, i.e. Delaware LP, via the National Private Placement Regime (NPPR), or marketing an EU fund, i.e. Luxembourg LP.

• NPPR means targeting a selection of countries. It is operationally easier, but you cannot access all of Europe. This is still Route 1 for the majority of North American GPs looking for European LPs. We have many clients successfully raising capital in this way.
• A Lux fund gives you access to the European marketing passport. It is operationally heavier and more costly, but potentially gives you access to more capital. Larger GPs and those with European presence might find this a better fit.

3. What are my peers doing?

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The majority of North American GPs raising capital in Europe do so via NPPR. Many have done so for multiple vintages of multiple strategies. Lux is of great interest to many, but most can raise enough via NPPR to not require a separate European structure. We have observed this changing over time and see more Lux funds each year.

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4. How do I choose which option is best?

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To best map out the market and assess LP demand, we would recommend using our Hosted Pre-marketing service. This allows you to “pre-market” your product to European LPs, ahead of establishing any potential European substance. If demand doesn’t warrant a full Lux fund, you can decide instead to market via NPPR.

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5. How long does this all take?

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Pre-marketing can be up and running within 2-4 weeks, most will use it for 3-4 months (or longer). NPPR applications can take between a few days to 6 weeks in most countries that allow it, but Denmark may take longer to be proved, depending on the jurisdiction. A Lux fund can be established and up and running in three months.

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6. NPPR sounds good, what do I need for that?

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Once you have decided which countries to market in, your regulatory funds counsel will assist with the marketing applications. There will be ongoing reporting requirements in each country also. These are known as “annex IV” reports, and are similar to Form PF. Langham Hall will take care of these. If Germany and Denmark are on the list you’ll need to name a depositary-lite provider in your marketing applications. Langham Hall can also assist with that.

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7. I like the idea of Lux vehicle, what does that entail though?

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For a Lux fund you will need a host-AIFM, fund admin and depositary. Langham Hall can provide all of this from our 250 person office in Luxembourg.

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8. What about the cost?

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Pre-marketing is very cost effective. NPPR is also relatively inexpensive. A Lux fund should be targeting €200m minimum to be cost effective.

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9. How do I find out more?

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If you’d like to hear more, drop us a line and we’d love to speak further. You’ll only speak to partners and practitioners, no sales people, so we know what we are talking about and can help you work out what the best approach would be for you.

The Jersey Private Fund (‘JPF’) regime has been a huge success since its inception in 2017 with over 700 authorised to date, offering sponsors a fast-track (48 hour) regulatory approval process for a flexible and cost-effective fund with access to EU and non-EU private markets.

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On 2 July 2024, the Jersey Financial Services Commission (‘JFSC’) issued updates to the Jersey Private Fund Guide (‘JPF Guide’) following consultation and feedback from industry members, and as a whole, has sought to refine and improve the existing regime.

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The material updates are as follows:

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1. Investor eligibility:

• Clarification that investor eligibility is determined and satisfied upon admission into the JPF, and such eligibility may be relied upon despite a status change for the investor (for example a departing employee director, partner, or expert consultant etc).
• Updating the definition of ‘eligible’ in relation to employees of investment businesses or other service providers, by removing the ‘senior’ employee definition and replacing with ‘financial sophisticated’.
• Clarification regarding transfers of interest, whereby there is no requirement for the transferee to qualify as a ‘professional investor’ on the same criteria as the transferor, provided the transferee meets the definition of professional or eligible under the JPF Guide.

2. Governing body:

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Clarified the JFSC’s expectation that there should be at least one or more Jersey resident director appointed to the JPF board/governing body.

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3. Carry and co-investment vehicles:

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It is now recognised that a co-investment scheme may form part of the JPF’s carry and/or incentive arrangement and provides greater flexibility as the vehicles can be admitted into the JPF without counting towards the ’50 or fewer’ investors test (provided they meet the criteria of the JPF Guide).

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4. Arrangements that fall outside of the JPF regime:

• The JPF Guide has been revised in respect to schemes that would be ‘exempt’ and therefore not treated as a JPF (under Annex B of the JPF Guide), where there are employee or family connections between investors in the vehicle. The definitions around employee or family connections (including ‘relative’) have been widened and now include trusts established for a person satisfying the new definition of ‘family connection’.
• Where a JPF is established outside of Jersey, it is expected that the management and control be in Jersey. That being said, it is possible for both to be outside of Jersey subject to the provision of information to the JFSC to establish the ‘indirect but relevant nexus to Jersey’.

The collaborative approach by the JFSC with industry participants and the subsequent amendments brought forward are only believed to make the regime even more attractive to global fund managers, providing further flexibility to a reliable, well-regulated and cost-efficient jurisdiction, strengthening Jersey’s position as one of the leading domiciles of choice for private alternative investment funds.

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Our team has a vast range of experience establishing and operating JPFs since the regime was introduced, supporting sponsors throughout the life of their fund product from setup and marketing to compliance and administration.

We are delighted to announce our new office in Tokyo, Japan, which will be led by Shinobu Miyata, our Head of Japan.

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Prior to Langham Hall, Mr. Miyata spent 7 years as COO of a secondary strategy GP, leading fund formation and management in both Cayman Islands and Japan, as well as secondary transactions including several GP-Led secondaries. Mr. Miyata also established the Japan office of a global fund administrator in 2007 and led the business successfully for 7 years.

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Welcome to Langham Hall, Miyata-san!

We are delighted to announce that Langham Hall has won the “Best Fund Administrator – $50-500bn (total AUA)” category at The Drawdown Awards 2024. This category recognises best in class administrators working with top tier clients across Europe.

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Commenting on the win Rob Short, Managing Partner said: “We are delighted to have been recognised with this award. Our partner-led, client centric approach makes us increasingly unique in this market as we continue to support both emerging and established managers across Europe.”

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The Drawdown Awards celebrates excellence and innovation within private fund operations. The judging process is based on the views of a panel of leading private capital fund COOs, CFOs, CCOs, GCs and CTOs.

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Find out more about The Drawdown Award here.

In August, the Securities and Exchange Commission (‘SEC’) issued the new Private Fund Adviser Rules which required fund managers to issue quarterly performance, detailed fee reports, granular performance metrics and perform annual audits amongst other new requirements with the aim of increasing transparency in the industry.

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The additional requirements applied to private equity and venture capital funds as well as managers of funds for institutional investors such as pension funds and endowments.

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These were burdensome requirements that would have led to significantly more detailed reporting being delivered to investors in tighter timeframes, as well as an increased burden on fund managers to disclose what was previously considered to be confidential information.

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Last week a US court overturned the SEC requirements which has been positioned as a win for the industry. This means that fund managers will not be required to meet the new requirements, as of now. It is anticipated that the SEC may petition for this ruling to be re-considered, Langham Hall will continue to monitor any developments.

The final text of the amendments to the Alternative Investment Fund Managers Directive, known as ‘AIFMD II’, were published in the Official Journal of the EU on 26 March 2024, coming into force on 15 April 2024. EU Members have 2 years from this date to ensure the new rules are written into national law.

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Although AIFMD II is not an entire change of the current legislation and less impactful than initially expected, it includes material amendments targeting provisions of the previous directive that fund managers need to be aware of and assess the result on their private funds business or operation.

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Changes affecting the marketing rules and reporting for non-EU AIFs/AIFMs:

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Non-EU managers marketing into Europe via the National Private Placement Regime (‘NPPR’) will be caught by the enhanced reporting obligations and requirements (specifically asset and market related data) under Annex IV reporting – the regulatory requirement triggered by formally marketing a non-EU fund in most European states.

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Changes affecting EU AIFs/AIFMs:

1. Loan origination: New requirements on EU AIFs that carry out ‘loan origination’ (defined as providing a loan either directly, or indirectly through special-purpose vehicles), as AIFMD II targets the compliance and governance associated, including but not limited to, policies and procedures of the AIFM, risk retention, diversification, conflicts of interest and the leverage limits of the AIFs involved.
2. Liquidity management: Conditions on liquidity management for open-ended AIFs, whereby the managing AIFMs must use at a minimum two liquidity management tools from an explicit list. Practically speaking this is already prevalent, however the update now requires that the liquidity management tools be selected from a specific list and be appropriate in relation to the investment strategy, fund profile and redemption policy of the AIF.
3. Depositary: AIFMD II provides flexibility for a depositary to be domiciled in a different EU state than the appointing AIF, subject to certain conditions and approval from the AIF’s regulator. For example, it is appreciated that some markets have a lack of competitive supply of depositary services, leading to increased costs and inability to effectively meet the needs of the AIF in regard to its investment strategy. Nevertheless, this is not automatically permitted even if conditions are met and would only be considered by authorities after a case-by-case assessment. To be clear, AIFMD II does not permit depositary passporting, contrary to the expectations of the amendments.
4. Annex IV reporting: Enhanced reporting obligations and requirements, as mentioned above.

Non-EU GPs

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Even though we are seeing an increasing number of non-EU fund managers set up parallel funds in Luxembourg, marketing via NPPR is still the preferred route to raise capital in Europe for most non-EU managers, which allows targeted county by country marketing. Even under the NPPR route, there are certain continuing regulatory requirements including Annex IV reporting. Although many North American and UK GPs may feel that AIFMD (and any amendments) would not apply directly to them, it is important to understand the impact to their cross-border business model, especially those who have (or intend to) market their products in Europe. AIFMD II will implement enhanced scope under Annex IV reporting, a service we provide to many non-EU managers, specifically around the delegation of portfolio or risk management, markets, instruments, exposures and assets of AIFs managed.

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It remains possible under AIFMD II for an EU AIFM (or ‘host AIFM’) to delegate portfolio management of an EU AIF to a non-EU fund manager, however the amendments impose closer scrutiny of the delegation arrangement and as such, non-EU fund managers involved in this model should expect to be subject to increased supervision and enhanced monitoring by the EU AIFM.

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Although ‘depositary passporting’ in Europe is still not permitted under the new rules for an EU domiciled fund under AIFMD, depositary-lite services to a non-EU fund (for the purposes of registering for NPPR in Germany and/or Denmark) remains possible from a non-EU state (for example from our London office).

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EU AIFs/AIFMs

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Many of the amendments targeted at loan origination in fact mirror legislation already prevalent across EU states, so although on the surface the amendments do not appear to be too onerous or practically challenging, it achieves the objective to ‘level the playing field’ across Europe and is considered particularly significant as we see an increased number of credit funds launched in recent years.

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Material impacts to EU AIFs involved in loan origination, how these are managed and related exemptions:

1. Policies and Procedures: AIFMs managing debt funds must ensure effective and frequently reviewed policies and procedures are in place for the granting of loans, however, this does not apply to shareholder loans where the value of the loans is below 150% of the fund’s capital.
2. Diversification: Restricts lending to a single borrower if they are a financial institution, whereby the loan may not exceed 20% (directly or indirectly) of the fund’s capital – this is intended to limit relationship in the lending business with financial companies.
3. Conflicts: Forbids lending to the fund’s governing bodies and/or related parties (i.e., fund manager, depositary, employees) – exemptions are permitted for lending to entities under the consolidated group of the fund, if such entity is a financial undertaking which only finances borrowers that are not one of the above.
4. Risk retention: Ensures that the loan originating AIF retains 5% of the value of its granted loans and does not pass them on, for instance on secondary markets or further syndication. Exemptions apply if the fund is being wound down and assets liquidated to enable investor redemptions.
5. Leverage limits: Differentiates limits of open-ended and closed-ended funds regarding ratios for value of the loan and total fund value.

Taking everything into account, the impact of AIFMD II is arguably limited aside from the most significant of amendments targeted particularly at debt fund managers and funds involved in loan origination, enforcing regulation where there previously may have been a lack of consistency across Europe. That being said, whether or not managers are targeting European capital with an EU AIF under a European marketing passport, or registering a non-EU AIF through NPPR, compliance of AIFMD and any amendments should be of utmost importance.

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To lighten the regulatory burden and offer efficiencies, we offer host AIFM and depositary services to support managers achieve their marketing strategies in the EU for their funds. Increasingly, we are also seeing non-EU fund managers opt for our hosted premarketing service to assist navigating the decision between NPPR or a Lux parallel route. Langham Hall specialise in providing host AIFM services for investments in illiquid assets for European and non-European managers without regulatory permissions, working closely with GPs to navigate the changing regulatory environment and challenges associated with fundraising in Europe and the ongoing operation, reporting and compliance of EU and non-EU alternative investment funds.