Posted on 06 November 2019
Global Fund Platforms and Raising Capital in Europe in an AIFMD World
Maximilien Dambax, Head of Fund Services North America at Alter Domus, and Antonis Anastasiou, Managing Director of Alter Domus Management Company, discuss how alternative investment funds are being structured and the challenges in operating a global fund platform in an AIFMD world that is about to see significant changes.
To support large capital-raising exercises involving a wide range of institutional investors, US managers are increasingly establishing global fund platforms either through parallel fund structures or with feeder fund structures that may include US, offshore and European sleeves. European sleeves and parallel funds are often designed to be compliant with the European Union’s Alternative Investment Fund Managers Directive (AIFMD), frequently in association with a combination of Delaware and Cayman vehicles to complement the fund platform. These structures cover a diverse range of institutional investors by catering to their particular legal, tax and operational requirements.
What options are available for attracting European institutional investors?
The alternative fund distribution and marketing landscape has changed dramatically in recent years, particularly in Europe with the implementation of the AIFMD in 2013, and further evolution lies ahead in the form of EU legislation amending the alternative fund framework. The AIFMD seeks to regulate the management of Alternative Investment Funds (AIFs), with Alternative Investment Fund Managers (AIFMs) required to meet key conditions regarding authorisation, general business conduct and marketing of the fund.
Accessing the European investor community is typically done via one of two marketing routes: national private placement regimes (NPPR) in certain jurisdictions where they are still in place, and the AIFMD compliant route. With NPPRs the manager must register with each national regulator to offer its funds in that market, but each market entails different levels of complexity, access to and availability of the regulator, as well as costs. The AIFMD - by adhering to a single set of rules – enables alternative asset managers to passport their fund to all countries within the European Economic Area. It is also ideal if seeking access to institutional investors such as insurance companies that are often required to invest through fully AIFMD-compliant vehicles or fund structures.
Options for EU and non-EU AIFs
Points for consideration:
- Under AIFM definition of master/feeder, over 85 percent of feeder must invest into master;
- Marketing of the EU feeder is only eligible if the master is an EU master managed by an EU AIFM;
- Non-EU managers looking to set up an EU feeder for marketing to EU investors should ensure they do not fall within the definition of master/feeder under AIFMD
How are alternative funds marketed to EU investors?
AIFMD-compliant alternative investment funds are marketed within the EU via the single market passport. A manager that is an authorised AIFM or has appointed a third-party AIFM can market its AIF in all EU states using a simpler regulator-to-regulator notification mechanism.
In July, legislation was finalised covering the pre-marketing of alternative investment funds within the European Economic Area, which is widely used by non-EU managers to exchange information about AIFs with investors. The new rules introduce a notification requirement for pre-marketing to professional investors in the EU and will have implications for reverse solicitation.
EU AIFMs that have taken advantage of pre-marketing will no longer be able to accept investments from any institutional investors through reverse solicitation for 18 months from the start of pre-marketing activity, and no investors contacted during the pre-marketing phase can invest via reverse solicitation. Instead they can only invest once the AIF is authorised for marketing in the relevant EU member state under the full AIFMD requirements. The legislation came into force in August and the new rules will be fully enforced from August 2021.
Under the new regime, only investment firms, banks, UCITS management companies or AIFMs will be authorised to conduct pre-marketing and marketing activities. This provision underlines the need for the appointment of an EU-domiciled AIFM for alternative investment funds raising capital within the EU by a non-EU based manager.
Are there any special considerations regarding global fund structures?
When setting up and operating a global fund platform, either involving a parallel fund or a feeder format, various operational factors should be considered.
Income and expenses
The deduction of costs cannot be conducted pro-rata from the overall structure, as AIFMD-related costs should be borne solely by the EU vehicle. The same is true for currency variants and hedging strategies through feeders or special purpose vehicles, as foreign exchange and hedging costs are attributed to and impact only the entities and investments they relate to.
Rebalancing mechanisms may be required to rebalance pools of assets across the different funds, due to varying progress of fundraising, operational constraints or capital availability. External bridge financing is one way to remedy this, but it entails additional direct costs. Master-feeder structures do not require a balancing mechanism for holdings, but they involve analytics requirements and capabilities to extract investment performance on an investment-by-investment basis.
Portfolio and risk management
The core functions of an AIFM are portfolio management and risk management of the AIF. One of these activities, but not both, can be delegated to a third-party AIFM if the delegate is an authorised and regulated asset manager in their country where they are established, and if a memorandum of understanding is in place between the domicile country of the AIF and that of the asset manager.
Where the manager of the vehicle is not considered a regulated asset manager in their country of domicile, the AIFM retains the role of portfolio manager and, in theory, has full control of investment in and divestment of assets by the AIF. Solid procedures should be followed in the onboarding phase to provide the necessary assurance to the asset manager that there should be no concern regarding the approval of the assets they recommend.
What pitfalls or challenges may arise in implementing and running a global platform?
While these structures offer flexibility for both investors and managers, they require a great deal more coordination and collaboration between the parts of the fund structure or parallel vehicles. This makes a vertically integrated approach across structures from fund to asset level critical. Partnering with a fund administrator with management company capabilities helps ensure that compliance, internal controls, regulator and investor reporting and performance evaluation are streamlined across the board.
Vertical integration also simplifies the generation of data required for investment and risk management. End-users often require access to more than just live portfolio data, and may expect data and analytics at the fund, intermediate holding and portfolio company levels. This is best achieved through interactive portals that provide access to all pertinent data through drill-down and slice-and-dice functionality.
When conducting fundraising rounds, asset managers must identify robust partners that can provide a full suite of services across multiple jurisdictions with a high level of expertise along with specialist local insight. Running an EU parallel fund or an EU-specific entity represents an additional cost for US and other non-EU asset managers, and the efforts undertaken by some groups to develop these capabilities in-house or use multiple service providers to lower costs are often unsuccessful – managing multiple service providers across various jurisdictions can add to asset managers’ administrative burdens.
Selecting a single provider that can not only service AIFs and SPVs in all jurisdictions required but deliver management company services with interactive access to the structure’s data leaves asset managers better equipped to manage complex inter-connected fund structures – and frees them to focus on fundraising and investment strategy for their EU institutional investor base.