The implementation of the Alternative Investment Fund Managers Directive (the “AIFMD”) in Europe has significant implications for U.S. and other non-European fund managers wishing to access European capital.
When raising a private investment fund, a non-European fund manager will not be required to comply with the AIFMD obligations and requirements in respect of a prospective European investor where that European investor made an unsolicited request for information about the private investment fund (referred to as “reverse solicitation” or “passive marketing”).
Reverse solicitation generally is important for a non-European fund manager, but is likely to be most important (1) where a prospective investor is domiciled or has its registered office in a European jurisdiction where it is not possible for the fund manager to market actively to that prospective investor (e.g., where it is only possible to interact with a prospective investor if there is a valid reverse solicitation in respect of that prospective investor), and (2) where there are strict time limits in respect of a fundraising that would make it difficult or impossible for the non-European fund manager to adhere to the new AIFMD obligations and requirements (e.g., where the non-European fund manager is looking to establish a co-investment vehicle to invest alongside an established fund for the purpose of taking advantage of a particular investment opportunity and desires to offer participation in that co-investment vehicle to European investors).
AIFMD: A Brief Background
The AIFMD is an EU directive that aims to establish a harmonized regulatory and supervisory framework for fund managers (European and non-European) that manage and/or market alternative investment funds in Europe.1 However, the AIFMD is implemented into national law independently by each EU member state2 (and, in due course, by each EEA state as well3), and at present there is very little central guidance on many of the concepts under the AIFMD (including as to the practical meaning of "marketing").
As things stand currently (absent a reverse solicitation), a non-European fund manager wishing to "market" a fund in Europe must (1) rely on the national private placement regimes then effective in the relevant European jurisdictions and (2) comply with the AIFMD disclosure rules and the "no asset stripping" provisions applicable on the acquisition of control of a European portfolio company.4 In addition, a non-European fund manager marketing in Europe should be aware that cooperation agreements – intended to help regulators oversee potential systemic risk – must be in place between the regulator in each European jurisdiction where the non-European fund manager is marketing, and the regulators in the jurisdiction(s) in which the fund and the fund manager are established.
There is no consistency as to the national private placement regimes in place across Europe. Broadly, the regimes may be characterized as follows:
- No active marketing. A non-European fund manager may not "market" its funds; a U.S. fund manager may only rely on reverse solicitation to engage with prospective investors (e.g., Austria, France, Greece, Italy and Spain).
- Approval of local regulator. A non-European fund manager may "market" its funds but only after obtaining the approval of the local regulator (e.g., Denmark, Germany and Sweden). The relevant regulator may take up to three months to grant its approval, although the exact period varies from jurisdiction to jurisdiction. In some jurisdictions the local regulator will only approve an application if additional conditions not required by the AIFMD have been satisfied – for example, in Denmark and Germany, the appointment of a depositary to perform certain specified services for the fund.
- Notification to local regulator. A non-European fund manager may actively market its funds, but only after notifying the local regulator (e.g., Belgium, Finland, Ireland, Luxembourg, the Netherlands and the United Kingdom). In some jurisdictions, the local regulator must acknowledge a notification before "marketing" may begin (e.g., Belgium, Finland and Ireland).
Reverse Solicitation: The Basics
It is only where a non-European fund manager "markets" a fund in Europe that it has to comply with (1) the rules that constitute the national private placement regimes, and (2) the additional AIFMD obligations and requirements.
Reverse solicitation (or passive marketing) – where a fund manager responds to a genuinely unsolicited request for information that is made at the initiative of a prospective investor – does not constitute "marketing," meaning that the fund manager does not have to comply with the rules constituting the national private placement regimes or the additional AIFMD obligations and requirements.
However, like "marketing," reverse solicitation is defined differently in each European jurisdiction. Furthermore, it is defined narrowly in most, so should be relied upon with caution.
Impact of "Brand" Marketing
As a general rule, "brand" marketing – where a fund manager provides general information about itself without providing information on any funds that are or will become open for investment – will not constitute "marketing."
However, a fund manager should take care where brand marketing is not in the ordinary course and takes place during (or in the run up to) fundraising for a particular fund product, because such brand marketing may prejudice a fund manager’s later reliance on reverse solicitation.
A Practical Application
AIFMD marketing rules apply per fund vehicle (that is, to each feeder fund, parallel fund, main fund, etc.) and therefore a private fund manager making a marketing notification or receiving a marketing approval in a European jurisdiction must be undertaken on a fund vehicle by fund vehicle basis.
When a non-European fund manager considers establishing a multiple investor co-investment vehicle, there are a number of European marketing considerations that may need to be addressed:
- If participation in a co-investment vehicle will be offered to European co-investors, subject to paragraph (2) below, the offer likely will constitute "marketing" and the rules constituting the national private placement regime in each relevant European jurisdiction will need to be complied with. The practicalities of compliance may prove to be impossible, particularly in those jurisdictions where a marketing approval must be obtained.
- If participation in a co-investment vehicle will be offered to European co-investors that are existing investors in an established fund (or the “main fund”), it may be possible to rely on reverse solicitation as a mechanism to offer participation in the co-investment vehicle to those European co-investors that have provisions in their main fund side letters indicating their interest in future co-investment opportunities.
- The AIFMD does not apply to a non-European fund that completed European marketing before 22 July 2013 (an “out-of-scope fund”). However, if a co-investment vehicle is established to invest alongside an out-of-scope main fund and participation in it is offered to European co-investors, in some respects the out-of-scope fund will be impacted by the AIFMD. The most obvious impact will arise where the co-investment opportunity is in respect of a European portfolio company and the co-investment vehicle is subject to the AIFMD notification rules and "no asset stripping" provisions in respect of that European portfolio company.
In summary, reverse solicitation under AIFMD should be relied upon with caution, but in a number of circumstances may be the only possible route for U.S. and other non-European fund managers to raise European investor capital.
1. The AIFMD introduces the term "AIF" (alternative investment fund). The concept of "AIF" is very broadly defined and includes almost any investment fund – whether closed or open-ended, irrespective of investment strategy or structure – other than European regulated retail funds.
2. The EU member states (subject to future expansion) are: Austria, Belgium, Bulgaria, Croatia, Czech Republic, Cyprus, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, the Netherlands, Malta, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.
3. The EEA states that are not also EU member states are: Iceland, Liechtenstein and Norway.
4. See "AIFMD and Fundraising in Europe: Practical Considerations for Non-EEA Fund Managers" in the Fall 2013 issue of The Debevoise & Plimpton Private Equity Report for more information.