| INDOS Financial founder Bill Prew |
By Bill Prew
For the large number of U.S. managers marketing their hedge funds in Europe, the game will change dramatically on July 22, 2014. That’s the day Europe’s new raft of hedge fund regulations embodied in the Alternative Investment Fund Managers Directive comes into force.
Change isn’t necessarily a bad thing. For U.S. managers interested in raising money in Europe, embracing AIFMD could be well rewarded. Still, it’s going to be painful, particularly for U.S. firms seeking first-mover status and thus having to work through the largely untested additional compliance obligations imposed by AIFMD. But there will be rewards.
First, AIFMD managers will gain a competitive advantage in being able to access the increasingly active pool of wealthy European investors — and maintain existing access to those investors — while managers who choose to stay away from Europe will lose that access. Second, firms will be able to manage the very real compliance and business risk to their business that will result from noncompliance with the marketing rules. In short, attempting to stay in the game post-July without AIFMD compliance is at worst not an option and at best a potentially short-sighted and costly plan.
The AIFMD actually came into force on July 22, 2013, but Europe-based managers had a full year to complete their compliance. U.S. and other non-EU managers that do not manage EU funds or market non-EU funds in the EU are outside the scope of AIFMD. But for the large number of U.S. managers that do manage or market such funds, the AIFMD imposes a number of additional investor and regulatory disclosure and reporting obligations, including the European equivalent of form PF regulatory reporting.
It’s not all stick and no carrot. Another potential benefit of the AIFMD is the introduction of a pan-European marketing passport. This gain is not available to U.S. managers at the moment, being limited to EU funds managed by authorized EU managers. However, it is anticipated that the passport should become available to compliant U.S. firms in a year or two.
In the intervening period, as has been the case to date, the principal route for non-EU managers to market to European investors is via national private placement regimes — country-by-country rules that govern the marketing of funds to professional investors.
Some U.S. managers may reasonably believe that this increasingly complex European regulatory regime should be consigned to the “too hard” basket. But the good news is that even for them, the door won’t completely close. An alternative to marketing is to seek to rely on reverse solicitation. That means U.S. managers can accept capital from European investors who approach the manager directly, as long as the manager does not take any initiative when it comes to marketing the fund, whether directly or via a third party.
Many U.S. managers appear to be planning to avoid having to deal with AIFMD by relying on reverse solicitation. But this tactic comes with compliance and business risk. AIFMD has raised marketing up the regulatory radar, and countries are tightening their private placement regimes and marketing rules. This increased regulatory focus could result in unlawful marketing activity being brought to the attention of a manager’s home regulator by a local EU regulator. In some EU countries unlawful marketing will constitute a criminal offense. There could be an increased risk of investors bringing private claims for mis-selling.
In Europe the prevailing view is that many U.S. managers are adopting a wait-and-see approach to the AIFMD. There are also suggestions that U.S. managers will shun Europe as a result of the directive. Some argue, speciously, that European investor interest in alternative funds remains diminished. On the other hand, there have also been reports that European investors, looking for access to specialist providers and asset classes, are concerned and frustrated that the AIFMD is reducing choice and access to U.S. managers.
Over recent weeks we have seen a noticeable increase in the number of managers working through the new requirements with a view to complying. The AIFMD itself does not provide a transitional period for non-EU managers, but many countries, notably Finland, Germany, Luxembourg, the Netherlands, Sweden and the UK, have extended the transitional year for U.S. and other non-EU managers, although in some cases only where a fund had been marketed prior to the July deadline.
Going forward, non-EU managers will, depending on the country, either need to register or seek authorization from the local regulator in order to market via private placement in the country. There’s time and effort involved in this process. Non-EU fund managers need to start the process now in order to avoid disruption to their business and their marketing.
Bill Prew is the founder of INDOS Financial, the first AIFMD Depositary business to be authorized by the UK Financial Conduct Authority. Previously, he served as chief operating officer of Moore Capital Management spin-out James Caird Asset Management and European chief financial officer of Barclays Global Investors.
