To market, or not to market? Trends in EU fundraising

Since the implementation of AIFMD, managers seeking to raise capital in the EU have seemingly been left facing a patchwork of marketing requirements. What we see is diverging national approaches in a number of important areas, leaving managers dealing with significant practical issues when trying to implement a cross-EU marketing strategy.

However, as AIFMD has begun to bed down, a number of common trends have developed in the way managers target EU investors, taking into account ongoing debate around what actually constitutes marketing for AIFMD purposes, as well as increasing focus on how narrowly in practice reverse-enquiry may be interpreted under AIFMD.

WHAT IS AIFMD MARKETING?

Reflecting on these first two years of AIFMD, it is still surprising the lack of clarity that exists on some quite fundamental concepts, particularly what exactly is marketing. For example, is there certain promotional activity you can carry on before coming within the scope of AIFMD? Is there a certain level of soft or pre-marketing that is acceptable? Unfortunately, the answers can still vary from one EU jurisdiction to another.

What we have seen is jurisdictions taking different approaches to defining marketing, some adopting a narrow concept of what is acceptable as pre-marketing and others adopting a much broader interpretation. In some jurisdictions, such as Denmark and Sweden, marketing covers any form of advertising and sales promotion. In contrast, the position in other jurisdictions like the Netherlands and the UK can be that there will not be AIFMD marketing until documentation is in sufficiently final form for an investor to be able to make a subscription in a fund. This means that a real challenge has become establishing precisely where the tipping point lies between pre-marketing and marketing and how (if at all) this can be translated into a consistent, practical marketing strategy across the EU. That can be very challenging where in some jurisdictions even a draft private placement memorandum (PPM) may not be far enough along the line to be AIFMD marketing, but in other jurisdictions a teaser on a specific fund vehicle can trigger AIFMD requirements.

This is important both in terms of direct distribution of documents to investors, as well as what documents might be included in, for example, a data room prior to AIFMD registration. Likewise, the interplay of draft marketing documentation with a subscription document or a partnership agreement is significant. Can you really say that you are not at the AIFMD marketing stage if a subscription document has gone out, notwithstanding that the PPM might be in draft?

Given all of this, what we see becoming more common now, particularly for non-EU managers, is a conscious decision to focus energies primarily (or only) on those EU jurisdictions which allow a good amount of soft marketing without triggering AIFMD requirements. Being able to talk to investors on the basis of draft documentation allows managers, in those targeted jurisdictions, to assess real investor interest and so whether the time and cost of AIFMD registration is worthwhile.

Indeed, interestingly, those EU jurisdictions with a broader concept of pre-marketing have tended also to be the jurisdictions with more straightforward AIFMD registration requirements, making a manager’s cost-benefit analysis much easier. In some jurisdictions, for example, non-EU managers cannot commence marketing until formal approval has been obtained from the local regulator. These approval processes can be onerous, Germany and Denmark being notable examples, and can take several months to process.  For both jurisdictions a fund must also have a depository or custodian in place and the custodian arrangement must comply with various obligations under AIFMD, in terms of its role in relation to the fund, as well as the custodian’s status. At the other end of the spectrum (Luxembourg and the UK for instance) a notification to the local regulator must be provided, but there is no need to wait for formal approval before marketing – it is possible to start marketing from the day of registration.

REVERSE-ENQUIRY

Because of the challenges of AIFMD registration in many jurisdictions, when and how a manager can rely on reverse-enquiry from an EU investor is a hot topic. And yet this is as equally challenging as defining AIFMD marketing.  Other than an understanding that reverse-enquiry is interpreted narrowly under AIFMD, there has been a lack of clear regulatory guidance (or examples) of what in the regulators’ eyes would constitute a genuine reverse-enquiry.

At the same time, there is a growing sense that regulators may start to focus in particular on reverse-enquiry in the context of manager activity – looking at factors such as the number of investors involved, the audit trail of the manager in respect of the investor contact, and so forth. This comes in part out of regulators not receiving the number of AIFMD marketing registrations that they expected, with this in turn being interpreted as still a lot of fund investment taking place based on reverse-enquiry arguments. In part also, as a result of AIFMD, EU regulators are now faced with an increasing range of manager-investor interaction that falls into a grey area between AIFMD marketing and reverse-enquiry, from marketing of investment strategies (rather than specific fund vehicles) through to more novel approaches such as investors collectively establishing websites and then issuing requests for proposals to managers.

The real difficulty here is that, faced with such a range of manager-investor interaction, the reverse-enquiry test available to regulators doesn’t seem very flexible. Some EU regulators historically applied a relationship approach to reverse-enquiry – if the original contact with an investor was established in line with marketing requirements, then it was possible to reach out to that investor on similar new investments in the future and that would not be considered marketing. However, other EU regulators applied a transaction-by-transaction approach – notwithstanding that you might have an ongoing relationship with an investor, a manager would need a fresh reverse-enquiry for each and every transaction/investment. Post-AIFMD, it is not clear to what extent those differing approaches still exist. Certainly, taking into account other EU regulatory developments in the pipeline such as MiFID2 (the revised broker-dealer regulation) which has an even narrower definition of reverse-enquiry (linked to manager-investor interaction being at the exclusive initiative of an investor), it feels that the relationship approach is dead for EU regulators.

The implications of this are certainly being felt in practice.  Taking the quite common example of a manager having an ongoing relationship with an investor from an existing fund, that relationship is likely to include discussions (over a short or medium time horizon) of the performance of the manager, possible new investments, interest in potential future fund raises and so on without a specific fund or investment opportunity being proposed. However, once the manager comes to raise its next fund, it will want to gauge whether the existing investor is still interested in the potential fund opportunity. Whilst there has not in that scenario really been any active marketing to the investor of the new fund, it is not clear either that the manager can treat interaction with the investor as a reverse-enquiry (even though the relationship with the investor has already been established prior to the new fund raise). And so more and more we see managers analysing whether in practice they can discuss new funds with existing EU investors.

What we have seen this translate into, again, is managers targeting those EU jurisdictions which are more certain in their scope on pre-marketing, and more straightforward in terms of AIFMD registration. For other EU jurisdictions, it is becoming a watching brief, monitoring any developments or regulatory guidance which can provide more certainty as to the permissibility of approaching investors.