Three routes to Europe for US fund managers: pros and cons

The European regulatory landscape has a bearing on the fund structure an overseas fund manager might use to target European opportunities, and where that structure might be domiciled. 

Put simply, the bigger you feel your European opportunity is, the more benefit there will be in setting up a dedicated EU-based hub. On the other hand, if you are just dipping a toe in the water, you may want to remain outside the EU and keep cost and complexity to a minimum. 

Here are three routes to Europe for US managers and some of the pros and cons of each.
 

1. Use your existing fund structure. You already have a vehicle in Delaware or Cayman, so why not simply market that fund to European investors? 

PRO: The pros of this approach are obvious: administrative simplicity and reduced cost. 

CON: The challenges can be significant. Many European investors require a regulated fund structure because of regulatory and tax implications, and some of them will only invest in a fund regulated by the EU. Selling your Delaware or Cayman fund in Europe will limit both your potential investor base and the marketing activity you can employ to reach it.

In addition, having significant numbers of non-US entities investing into a Delaware structure may complicate the fund’s tax situation.
 

2. Use an offshore feeder structure. US managers often use a standalone or (more frequently) a feeder structure for non-US investors in US assets, typically in the Cayman Islands or the British Virgin Islands. 

PRO: This is a familiar route for US managers looking to raise non-US capital, and one that avoids non-US investors facing US tax obligations. Standalone or feeder structures are also commonly set up in the Channel Islands of Jersey or Guernsey, which have strong ties to both the UK and the European mainland, and also on-the-ground expertise in raising capital in Europe. 
CON: Whilst offshore feeder structures can help sidestep tax issues, they face the same regulatory hurdles when marketing to European investors, some of whom are barred by statute from considering a non-EU fund. 
 

3. Set up an EU AIF. Setting up an EU AIF means being subject to the full weight of AIFMD regulation. It means you need an AIFM, which can be in-house or outsourced to a third party, and further service provider support. 

PRO: In terms of marketing, it is certainly the most advantageous. An EU AIF and AIFM can use the EU marketing passport to market seamlessly across the continent and can therefore target the deepest pool of European investors.
CON: It is the most costly and administratively complex route to Europe, in part because the EU fund cannot be used as a feeder for a US- or Cayman-based master structure and has to be set up as a separate entity. 

To summarise:
 

Download ‘A guide to setting up your fund in Europe’

This article is extracted from Ocorian's guide on how to raise capital in Europe, aimed at non-European asset managers.
In this guide, we provide a pragmatic overview of the fundraising process and answer the most frequent asked questions asked by investment managers including:

• Should you set up a new fund or use an existing offshore structure?
• What is pre-marketing and which activities are forbidden?
• What are the pros and cons of the different approaches to marketing in Europe?
• How important is ESG when marketing funds in Europe?

Fill in the form to download your free guide on ‘How to raise capital in Europe’:

Ocorian Fund Services

At Ocorian we have extensive experience supporting US fund managers with setting up alternative investment funds in Europe and administering them throughout their lifecycle.

We have teams across seven jurisdictions in Europe that provide a high touch, technology first approach combined with local expertise.

We offer a full service offering from fund set up and administration through to fund accounting, AIFM, investor services and depositary.

• Fast and efficient set up of funds in Europe
• Teams based in the UK, Jersey, Guernsey, Ireland, The Netherlands and Luxembourg
• AIFM in Ireland and Luxembourg
• Expertise in administering vehicles parallel to existing US or Cayman structures
• Jurisdiction agnostic
• Full service provider

Our business development team in the US will be happy to discuss your European requirements and guide you through the process. Contact us for more information.