Europe may provide a compelling funds story, but for US managers looking to fundraise in the Continent, the devil, as always, is in the detail.
Covid-19 may have put the brakes on people's travel plans for a prolonged period, but it certainly didn't dampen enthusiasm for far-away places. And if US fund managers' appetite for fundraising in Europe is anything to go by, that enthusiasm seems to be in good health.
US fund managers are being drawn to Europe by the abundant capital that's available in the region - and by the appetite of Europeans to invest that capital with them. Given the ongoing economic and geopolitical turmoil around the world, stretching from before the pandemic to the impact of the Russian invasion of Ukraine, it's understandable that European asset owners should be keen to diversify their investments.
As discussed by the panel on a recent webinar hosted by IFI Global and sponsored by Ocorian - 'Capital raising in Europe: what US fund managers need to know' - US fund managers have plenty of options when seeking to promote their strategies and fundraise in the region.
Jurisdictions like Luxembourg and Ireland offer huge appeal for pan-European raises, as the second and third largest fund domiciles in the world, respectively, each with trillions in assets under management.
Yet countries like Germany and France may appeal too, if a manager is looking to target specific investors. And thanks to the Alternative Investment Fund Managers Directive (AIFMD), fund managers offering a quality, reliable product can receive a passport to a wealth of different marketing options across the entire economic zone.
A region of differences
Entering the European market can still be challenging, and the webinar panel was quick to highlight a key danger - that fund managers may be coming into the region without properly thinking it through.
For starters, there are the complications that come from the fact that Europe, while a vast landmass like the US, isn't a single country.
"When you operate in the US, you're very familiar with raising capital from US institutional investors and endowments," said panellist Marc van Rijckevorsel, Ocorian's Head of Business Development for Corporate & Fund Services in the US. "In Europe, it works slightly differently. You have multiple jurisdictions that you can select for your fundraising and where you set up your funds."
The quirks of each individual jurisdiction can affect the time-to-market and complexity of launching funds. While the Alternative Investment Fund Management Directive (AIFMD) passport is a huge help, private placement in each country separately is a potentially more cost-effective option. But that is regulated by the various local laws, making access more complicated. In Italy and France, for example, private placement is virtually impossible.
Yet even AIFMD has its complications. While it applies across Europe, to any manager of a fund that is domiciled in the EU, each jurisdiction may apply it using local law, with subtle differences. As US fund managers may well be using multiple European jurisdictions for fundraising, each with different advantages for different types of investors, that's going to add extra complexity.
There are plenty of other sources of complication. Substance rules already vary between jurisdictions. And new regulations are adding complexity too. The Cross-Border Fund Distribution (CBFD) directive was implemented in August 2021, introducing the concept of pre-marketing - where speaking to potential investors to gauge their interest in a fund is permitted, as long as managers stop short of providing subscription agreements. They must also notify the relevant jurisdictions that they are doing so.
They then have 18 months to get the fund raised and sell the interests. Failure to do so will result in being barred from marketing that strategy for 36 months.
Panellist Thomas Fahl, Managing Director, AIFM Services at Ocorian in Luxembourg, called it out as an example of red tape that doesn't make things any easier for fund managers. "The question is who is allowed to do the pre-marketing, who is allowed to approach a prospective investor? Something that fund managers have been doing for decades," he said.
"In the old days of the Rolodex, going through and then calling up was something that was just done. Now you have an EU directive that tells you: Hang on, you can actually only do that if you yourself are a regulated entity falling into a certain category.
That puts a lot of our clients and prospective clients into a bit of a conundrum, in a way they are not regulated to perform this activity on their own. Now, they actually need somebody like an Ocorian, in Luxembourg or in Ireland, with a licence as a firm, to provide them with this kind of regulatory umbrella to be able to do just that."
Four actions for US managers to consider
So, while US fund managers are right to look to Europe as a viable source of capital, with options to suit a range of fundraising needs, it's clear that fund marketing decisions need careful consideration, given the complex regulatory environment.
Here are four key actions that US fund managers may wish to think about, when looking to raise capital in the EU.
Pick the right strategy for you and your investors.
Raising capital in Germany or Italy, for example, can bring very different results from, say, Sweden. So it's important to understand how your proposed strategy matches with your desired investors.
The overarching question is how many investors you think you're going to want to bring into this fund, and whether that makes it worth going all the way and setting up a full EU Alternative Investment Fund (AIF) and hiring an AIFM. Do you want to incur the associated cost? You could, for example, make things cheaper and more flexible by setting up a fund in Jersey, and then doing private placements into a couple of the more straightforward jurisdictions.
"If you want to raise only ?25 million from European investors, then going for a full blown, AIFMD-like structure doesn't make sense from a financial perspective," said van Rijckevorsel. "Because the cost to run that structure might be way too high."
Create partnerships that will last.
Fundraising involves a lot of external partnerships - with the AIFM, for example, the fund administration partner and the depository. If all goes well, these relationships will be long-lasting, so you need to choose wisely. Start with proper due diligence, and ensure all parties understand your strategy.
"These things do take a while to get in train before any agreements are signed," said panellist Stephen Hickey, CEO of Ocorian's Irish AIFM. "It's imperative at the start that you make sure you're choosing the right providers, and all the initial vigilance is up to scratch. And then, obviously, on an ongoing basis, that it's maintained."
Be mindful of the fast-moving rules.
The regulatory landscape is changing all the time. And European rules can often be implemented differently within each country.
While the relatively new CBFD doesn't generally apply to non-EU AIFMs, for example, it does in the Netherlands and Germany. Understand this up front, to make sure that you don't inadvertently start a clock ticking that will cause you problems down the line. If you decide that you're going to go into a market like Germany, and try to raise a fund on a pre-marketing basis, it's important to exercise caution.
Don't blindly choose a structure.
Simply copying a structure that you've seen succeed for other US fund managers is not a good idea. Speaking to local fund lawyers and tax advisers will help inform what structure you want, and the strategy you should take, to suit your specific situation.
A jurisdiction-agnostic adviser can help here, because they understand the type of clients they see succeeding in each region - with no vested interest in which jurisdiction you eventually pick.
"If you've heard that Ireland is great, you go to an Irish adviser, and they will immediately push you into an Irish structure, because that's in their benefit," said van Rijckevorsel. "But it might not be the best structure for you as a fund manager."
Conclusion
Europe offers a great deal to entice the US fund manager: including deep pools of capital, willing investors, expert professional service providers and a variety of jurisdictions to suit all fundraising needs, including world-leading fund markets like Ireland and Luxembourg. But it brings its own challenges - not least in that its regulation, already complex in its local application, is changing all the time.
As such, fundraising in Europe requires time and consideration, plus the support of lasting partnerships and jurisdiction-agnostic advisers, to land on a structure and strategy that will keep those investors happy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
