Brexit, AIFMD review, MIFID Cross Border Marketing Directive, Swiss FinSA….
Several material regulatory and political developments lie behind us. Whilst there is more to come, this is an opportune time revisit the state of play for private fund distribution in the Europe.
Taking a high-level view, PE fund sponsors can (i) attempt to comply with the EU distribution rules (AIFMD/MIFID as applicable), (ii) outsource all or parts of their fundraising or (iii) ignore the rules. We have seen clients (and their legal advisors) opting for each one of these approaches even though we notice a definite shift away from the “ignore” approach, which mainly runs under the guise of “reverse solicitation”.
Most sponsors naturally aspire to “direct compliance” but this is easier said than done. Direct compliance requires significant investment and typically involves setting up an EU regulated entity along with boots on the ground. We have seen several large multi-fund platforms embarking on that journey. Whilst they have the required internal resources and external advisors, they still struggle with a number of important but unresolved regulatory questions.
Since Brexit, UK regulated (as well as other non-EU) sponsors find themselves prevented from marketing to EU investors directly. As a reminder, the most typical set-up is a non-EU sponsor raising capital into an EU AIF (Alternative Investment Fund), typically hosted by a third-party EU AIFM (Alternative Investment Fund Manager). This set up is usually chosen to cater to EU investors shunning offshore vehicles. Whilst an EU AIF/AIFM structure benefits from a European passport, the distribution of the AIF needs to be carried out by a an appropriately licensed EU firm.
Fortunately, there are a number of services, both new and traditional, to bring relief to sponsors finding themselves in this unfortunate situation. The solutions can be characterized as follows:
1. Hire a third-party placement agent: tried and tested but expensive as a purely regulatory fix.
2. Set up a Tied Agent arrangement in an EU jurisdiction: this was the de facto go to solution for a while but recent regulatory scrutiny, suggests that it is at best a complex and temporary patch.
3. Delegate internal fundraising personnel to the host AIFM or appoint AIFM personnel to carry out the fundraising. Apart from employment and tax issues, such arrangements typically only work for limited scope fundraises (few investors/countries).
4. Appoint the EU based GP (typically in Luxembourg) as sub-distributor and appoint the (non-EU based) fundraising personnel to the board of the GP. Lawyers are split as to the legal basis of such an arrangement. Caveat emptor.
5. Delegated MIFID Distribution (DMD). A different approach offered by our MIFID licensed sister company FinDeal SA Luxembourg (www.findeal.eu). It works well for GPs wishing to delegate only the regulatory aspects of fundraising whilst retaining traditional IR and product specialist roles in-house. DMD is fast to set up and offers fixed pricing, independent of amounts raised. Contact [email protected] or [email protected] for further details.
And what about Switzerland’s new Financial Services Act (FinSA)? From this January, foreign financial service providers need to comply with a set of new marketing rules. Compliance is mandatory as soon as specific information about a financial instrument are provided to Swiss investors. Contrary to the EU however, full compliance is manageable thanks to several exemptions. In short, the type of investors targeted will determine the applicable regulatory obligations. The registration as “client advisors” in Switzerland will be required, for example, when marketing to HNWI or if you are not prudentially supervised. An affiliation with an ombudsman is also required in some instances.
European fundraising remains a piecemeal affair. There is no perfect solution and the best (least worst?) option depends in each instance on the set up and resources of the manager. Contact us to discuss your options, we are happy to help.