This article is sponsored by Ocorian
What opportunities exist for US fund managers looking to raise money from European investors?
Marc van Rijckevorsel: There’s currently a lot of capital available for US fund managers in other jurisdictions. Historically, a lot of US fund managers have focused on US LPs, but as the private equity market has matured and more investors have entered the asset class, there is a growing number of investors in Europe and the GCC region who have capital to deploy and are interested in identifying specialist fund managers.
We see more and more US fund managers setting up fund structures in Europe. Luxembourg is the jurisdiction of choice as the largest investment fund center in the world outside of the US, followed by Ireland, which may expect increased interest following positive changes in its investment limited partnership (ILP) regime. The challenges that arise obviously relate to the regulatory perspective: US fund managers are very familiar with the SEC rulebook but once they get to Europe, they need to appreciate that they are not dealing with one market, even though AIFMD is creating a level playing field.
It is also important for US managers to consider how they incorporate ESG principles into their operations and investment decisions. European investors and regulators are increasingly focused on managers’ commitments to ESG, evident in the introduction of the EU’s Sustainable Finance Disclosure Regulation, and more recently the asset management sector coming under the spotlight at COP26.
Pascal Loscheider: Although we have a legal framework at EU level, there is gold-plating in different EU member states so there are different requirements when it comes to setting up funds and marketing funds. This is something US managers often struggle with when raising capital in Europe for the first time. New entrants to the European fundraising market need professional advice to navigate the process. For managers that don’t have offices in the EU, we can provide substance and a broad range of services through our third party AIFM and management company.
What additional challenges are created by the new AIFMD regulation on pre-marketing rules, effective from August 2, 2021?
PL: The big advantage of this new pre-marketing directive is we now have clear guidance on how to undertake pre-marketing activities across the EU. Of course, before it was implemented there was already market testing, but there was no legal framework. Any activity that could be considered as pre-marketing was not defined in the original AIFMD and was left to the rules of the individual EU member states. That has now been clarified.
The new pre-marketing rules restrict pre-marketing activities to some EU regulated entities (investment firms, credit institutions, regulated AIFMs and UCITS management companies). This restriction is often a burden as in the past, testing the interest of potential investors was mostly done by (unlicensed) initiators of funds before engaging an EU-AIFM. However, we offer a service where we do the pre-marketing notification and conduct the pre-marketing activities with fund initiators.
MvR: For US fund managers without experience, there was a discrepancy between jurisdictions in the EU as to what counted as pre-marketing, and that has now been defined. What’s good to know is that US fund managers can test whether there is appetite for a fund strategy, and there is a process for doing that without having to set up a fund structure from the start. If a US fund manager intends to test an investment idea of an investment fund with European investors, they can appoint an EU-AIFM to do the pre-marketing notification to local regulators.
If there is little appetite, the manager can stop pre-marketing and they are not obliged set up a fund or incur many costs. There’s now much more clarity about that process.
What about raising money from Shariah-compliant investors? As a growing category of investors, what are these investors interested in investing in?
MvR: Investors from the GCC region have available capital to be deployed, especially investors from Saudi Arabia, Kuwait and the United Arab Emirates. The US is still seen as top of the bill for sophisticated, specialist fund managers and so that is a favored destination for them. These investors are seeking yield in other locations, especially for big ticket items, including in the US.
It is projected that Islamic finance assets will rise to $3.69 trillion by 2024, with growth driven by both Muslim and non-Muslim countries. Through our office in Dubai, we see a growing number of US fund managers increasing their fundraising efforts in the region, including hiring locally to promote investor relations. These investors have limitations on the investments they can make in order to comply with Shariah principles, which not only rules out investing in things like alcohol and gambling, but also prohibits the receipt of interest payments. That means GCC investors tend to favor real assets in property and infrastructure.
What specific structuring needs arise in relation to Islamic finance?
MvR: Since these investors need to comply with Shariah principles, a manager can obviously opt to set up a Shariah-compliant fund structure to specifically attract investors that require this, and we have a dedicated Islamic finance team that services many of those types of funds.
However, it is not essential for US fund managers to go down that route. What we increasingly see is US fund managers attracting investors from the GCC region and then setting up a specific feeder structure tailored to enable the Shariah-compliant investor to invest into the US fund. Approximately 80 percent of the time these investments are structured that way, with the legal adviser designing a structure using SPVs in for example, Cayman or Jersey to facilitate investment into the main US or Cayman fund structure.
Typically, the servicing of these structures is outsourced to providers like Ocorian and the fees for that are paid by the investor, so it’s not something that the US fund manager must bear the cost of.
How do you see these issues and perspectives evolving in the next few years?
MvR: Obviously the private capital environment continues to grow in popularity and large fund managers are tapping into new investor bases all the time. Most US fund managers see growing competition for capital and are looking to expand their investor bases into Europe and the GCC region – both markets will continue to present compelling opportunities.
Regulatory challenges are the biggest issue for US managers looking to fundraise in Europe, but while those hurdles are lower in the GCC region, managers face different challenges in accessing capital in a market that has distinct nuances and structuring requirements. In both Europe and the GCC region, US fund managers will benefit from working with the right service providers, whether those are legal advisers, placement agents or fund administrators.
Marc van Rijckevorsel is Ocorian’s Head of BD for Corporate & Fund Services – US Region in NYC, and Pascal Loscheider is Head of the Legal and Compliance team at Ocorian’s AIFM and management company services in Luxembourg.