How can UK fund managers market in the EU post-Brexit?
With the Brexit transitional period over, UK alternative investment fund managers (AIFMs) looking to market alternative investment funds (AIFs) in the EU find themselves subject to a quite different regulatory environment. While sub-threshold UK AIFMs have never had access to the EU Alternative Investment Fund Managers Directive (AIFMD) marketing passport (other than through the EUSEF and EUVECA programmes), full scope UK AIFMs now also find themselves without the passport and so must market in the EU via the patchwork of available national private placement regimes (NPPRs). UK firms whose marketing personnel previously interfaced with investors across the EU freely under the Markets in Financial Instruments Directive (MiFID) marketing passport must find alternative solutions to enable these activities to continue. In addition, from August 2021, new pan-EU rules will further complicate the position for UK AIFMs wishing to test interest in new AIFs during the “pre-marketing” phase, prior to commencing formal “marketing” for AIFMD purposes.
Below is a consideration of these regulatory hurdles and how UK AIFMs might continue to access EU capital in the post-Brexit world.
National private placement regimes
Prior to 1 January 2021, full-scope UK AIFMs were able to market UK and EU AIFs to professional investors via the AIFMD marketing passport, meaning only a single application to the FCA was required to market a UK or EU AIF anywhere in the EU. The EUSEF and EUVECA regimes also enabled certain sub-threshold UK AIFMs to market under specialist pan-EU passports.
Unfortunately, all of these are now unavailable to UK AIFMs, meaning they may only market AIFs in the EU under the various NPPRs. This presents several drawbacks. There are significant differences in the NPPRs between member states and, for example, in Italy and Austria it is effectively impossible for a UK AIFM to market an AIF. Even in less restrictive jurisdictions, such as Germany and the Scandinavian countries, the NPPR application process takes time and is burdensome and costly compared to passporting. The key for UK AIFMs intending to market under NPPRs will be to map out exactly which jurisdictions they are targeting and what the application process in those jurisdictions involves as early as possible in the fundraising process, to prevent any delays to closings.
An alternative to accessing EU capital via NPPRs is “reverse solicitation”: where an investor approaches the manager of its own volition and so no “marketing” takes place. Whether a reverse solicitation has happened is a question of fact, so managers should take care to retain as much evidence as possible that the approach was made by the investor. However, by definition, it is not possible to employ a reverse solicitation “strategy” to market a fund, so while it may be helpful in limited circumstances, it is unlikely to be a viable approach to a fundraising if substantial EU capital is being targeted.
As well as losing access to the AIFMD marketing passport, UK firms now also find themselves without access to the MiFID marketing passport, that previously enabled individuals to engage in promotional activities across the EU. While there are divergent views in different member states as to whether fund promotional activities technically constitute regulated activities under MiFID, UK firms conducting extensive marketing across the EU will no doubt wish to err on the side of caution and seek an arrangement with an EU regulated firm so that their marketing personnel can continue to access the MiFID passport.
There are three main solutions available: “tied agency”, where an EU regulated firm becomes regulatory principal to, and responsible for, the regulatory oversight of the UK firm – a potentially neat solution but one unpopular with many EU regulators; a secondment model, where marketing personnel are seconded to the EU regulated firm; or a “chaperoning” model, where marketing communications are routed via the EU regulated firm (and face-to-face meetings would be attended by personnel of the EU regulated firm). All these present both legal and operational complications, so UK firms should give themselves time to think through the details before commencing promotional activities.
Cross-border distribution of funds rules
Until recently there was no uniform definition across the EU of what constitutes “pre-marketing” – generally understood to be the phase before formal “marketing” when an AIFM tests the interest of potential investors – meaning that some countries took a flexible approach, while others effectively prohibited pre-marketing. This has now been addressed by the EU Cross-Border Distribution of Funds Directive: required to be implemented by member states by 2 August 2021.
Under the new rules, EU AIFMs and EU regulated firms on their behalf will, subject to certain conditions, be permitted to pre-market AIFs across the EU. For UK and other non-EU AIFMs, though, the new rules are less helpful, as the Directive does not provide any rights for non-EU firms to pre-market. It therefore remains to be seen whether individual member states will permit pre-marketing by non-EU AIFMs when the Directive is transposed into national laws – although the Directive is clear that non-EU AIFMs may not be treated more favourably than EU AIFMs, and any pre-marketing permitted would only be in the particular member state.
AIFMs which plan to use the new pre-marketing rules should also be aware that if an AIFM engages in any pre-marketing, it appears that it will be not be able to classify any subscription by an EU investor (not just the investor to whom the pre-marketing was communicated or even just investors in that member state) as a reverse solicitation for 18 months after the pre-marketing. This may encourage some EU AIFMs to skip the pre-marketing phase and go straight to formal marketing.
With thanks, Guest Insight article contributed by, Samuel Brooks, Partner, Investment Management Group, Macfarlanes LLP.