For many U.S. fund managers, raising capital in Europe is the next stop on the road once they have reached a certain size. Given that Europe is the second largest pool of capital after the U.S., with almost $120bn raised in 2021, it is not surprising. Expanding borders is a good way to increase capital, build momentum on the investment strategy, and generate a diversified pool of investors.
However, raising capital in Europe isn’t straightforward due to specific requirements in not only the European Union (EU) but individual countries. Despite the intention of regulators to remove regulatory barriers to cross-border distribution of alternative investment funds (AIFs) within Europe through the issuance of the Cross-Border Distribution Directive (CBDD) and the Cross-Border Distribution Regulation (CBDR) in August 2021, confusion still exists.
In this article, we will share three things U.S. fund managers should consider before raising capital in Europe.
Understand the regulations
It is essential to review the European Securities and Markets Authority (ESMA) regulations as well as the specific requirements of regulators in countries where a fund manager plans to engage prospective investors. These differences can affect the time-to-market of launching funds if not utilizing the Alternative Investment Fund Management Directive (AIFMD) passport as private placement in countries such as Italy and France, for example, is challenging.
The CBDD introduced ‘pre-marketing’ in 2021 which defines the line between ‘pre-marketing’ and activities that trigger AIFMD registration requirements. Fund managers can speak to potential investors to gauge their interest as long as they do not provide offering or subscription documents. They must also notify the relevant jurisdictions that they’re doing so. From this point, the manager has 18 months to raise capital. Failure to do so will result in being barred from marketing that strategy for 36 months.
Establish a Robust Network
To fundraise effectively, fund managers need a network. This is particularly true with the AIFM, as fund administration and depository partners are necessary. The right partners can help navigate regulatory complexity and help avoid pitfalls that could cause delays or draw regulatory fines. Choose wisely as the network should be built with a long-term view.
Choose the right fund structure
Given the nuances of each EU jurisdiction, it is important to seek the advice of legal counsel to ensure that the fund structure will suit the strategy and the business plan. Due to the uncertainty that accompanies regulatory differences between EU countries, it is likely a simpler, more flexible structure will benefit the fund manager and investors. In an earlier post, we shared that simple, standalone fund structures can help managers achieve benefits similar to AIFs but without the burden of expensive and time-consuming setup and maintenance.
Where to go from here There is no question that Europe offers U.S. managers with an established strategy and experience a new frontier of deep pools of capital, a large investor base and reputable service providers to build an international investment firm. But, it also brings a new set of challenges, namely regulation. Because of this, fund managers should do their due diligence, foster strong relationships with service providers who can help them navigate complexity, and keep their fund structures simple and flexible.