Authored by Eric Gronroos
U.S.-based fund managers actively looking to increase their assets under management (AUM) by expanding their investor base often look to Europe as the next frontier to market their strategy. This can be a beneficial move for managers with a strong investor reputation in the U.S. or a history of marketing funds in Europe. Expanding borders is a good way to increase capital, build on an investment strategy and provide diversification.
Fund managers unfamiliar with the fund environment in Europe are often provided fragmented information from local regulators, third party administrators and legal counsel. This leads to confusion, extra time and increased expenses. Below are key considerations for U.S. fund managers when launching a new fund in Europe:
Make sure to review the regulations set forth by the European Securities and Markets Authority (ESMA), as well as the specific requirements by the regulator in the respective country of organization. For example, there are different rules among European Union (E.U.) countries on what is considered the definition of “pre-marketing” your fund. European authorities have proposed regulations that all the member states would follow to help create consistency for fund managers. However, it remains to be seen if any new regulations would only apply to E.U. Alternative Investment Fund Managers (AIFM) with E.U. funds. As a U.S.-based fund manager, ensure you are aware of the definition that applies in the country where the fund is being organized. Luxembourg and Ireland have often been the most attractive countries for European-based managers to market new funds and increasingly popular countries for U.S. managers looking to move into the European market.
U.S. fund managers often find more transparency is required in the E.U. than what is typically disclosed in the Securities and Exchange Commission’s (SEC) Form ADV. The requirements set forth by the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/20101 (AIFMD) are viewed as guidance primarily put in place to protect European investors. Before expanding to Europe, U.S. fund managers should be aware of the disclosure requirements of the AIFMD report as it could influence their U.S.-based investor relationships and future funding.
Although this may seem relatively straightforward, fund managers do not always have an official or defined investment policy; this may simply be a paragraph in a private placement memorandum, limited partnership agreement or financial statement disclosure. U.S. fund managers may find these investment policy forms are not in accordance with Article 4(1)(a)(i) of the Alternative Investment Fund Managers Directive (AIFMD). To avoid any delays when setting up funds with your directors and third-party administrator (TPA), review the European Securities and Markets Authority (ESMA) AIFMD policy in addition to the E.U. member state’s requirements. Prospective European investors are unlikely to subscribe to a fund without a properly defined and responsible investment strategy in place.
It should also be noted that leaving full discretion to the AIFM to make investment decisions should not be used to bypass any requirements within the AIFMD.
Managers should allocate a sufficient amount of time when starting a new fund in the E.U. Many U.S. managers who work under the strict deadlines brought by U.S.-based regulators like the SEC, the Public Company Accounting Oversight Board (PCAOB) and the National Futures Association (NFA) expect quick turnaround times. This is often not the case when setting up a new fund in the E.U. There are often longer turnaround times when creating legal documents, providing information to directors, pre-marketing to investors and onboarding the TPA. European regulators often require the accounting function to be undertaken by a TPA based in the country domiciled, as they have the expertise required for local regulatory requirements.
If you are contemplating starting a fund in the E.U., our experts at Baker Tilly, including the members of our international network, Baker Tilly International, are here to help provide the insight and resources you need to make the right decision for your strategy.
European Union - European Securities and Markets Authority (ESMA)
Luxembourg – Commission de Surveillance du Secteur Financier (CSSF)
Specialized Investment Funds (SIF)