De-risking the launch of a European fund: Minimising upfront costs through pre-marketing

Considering a European fund launch? You're not alone. Many non-European asset managers are exploring this exciting market, but navigating the process can be daunting and costly if you don’t succeed.

However, a misconception exists around the launch process. Launching a European fund doesn't necessitate a massive upfront financial commitment. The process can be staged, allowing managers to test the waters through managed accounts, co-investment, or offering existing products to European investors. This staged approach provides valuable insights into actual demand before committing to a full European fund launch.

In essence, there's a middle ground between maintaining a domestic or Cayman structure and a full European launch. Managers can take smaller steps to gauge European investor interest and gradually build their presence in this growing market.

This article by Paul Spendiff, Head of Fund Services Business Development and Thomas Fahl, Head of AIFM Services at Ocorian sheds light on common concerns and offers a practical approach to assess demand before taking the plunge.

How do non-European managers typically approach expanding into Europe?

Two primary groups of managers are eyeing Europe. The first group has experience with overseas investors, traditionally using Delaware or Cayman structures. However, these options have become less favourable due to restrictions on regulated EU investors to commit into offshore vehicles. This group faces pressure from existing investors to find alternative solutions in Europe.

The second group comprises large asset managers, managing billions across multiple funds, who lack a European presence. While they suspect European interest in their products, they lack concrete data to confirm it.

Both groups face the challenge of assessing demand without a significant upfront investment. Traditionally, marketing a European fund involved setting up the structure first, incurring hefty costs. This initial hurdle discourages many managers from taking the leap.

However, there is a middle ground before fully taking a leap of faith and setting up a fund and many American managers are pre-marketing their funds in Europe for the first time. This signifies a growing recognition of the European market's potential.

How difficult is it for a US fund manager to enter the European market?

We often hear from US managers saying "Europe is a nightmare to deal with" or "It's so expensive and you need all these specialists to help you navigate the landscape." 

But that's a gross exaggeration.  Of course, time to market and cost can be concerns, but if you understand what regulations you actually need to comply with and find the right partner to handle the paperwork for you, it's really not that expensive. The key point is, within a couple of weeks, you can be ready to test the waters and see if Europe is a good fit for your product.

Is there a way to test the water without committing to a full set up of a fund?

We find that fund managers are often hesitant to commit a large sum of money to launching a fund without first gauging potential interest. This has been holding fund managers back because they want to explore the possibility of marketing to a European audience but know that they are realistically looking at $500,000 to set up and operate a fund in Europe which is a big up-front financial commitment when you don’t really have much proof to quantify the demand.  Most fund managers that don’t have deep pockets will shy away from this as it’s a big leap of faith.

By conducting pre-marketing, the fund manager can test the waters and see if there's actual demand for their fund. If there's no interest, then the cost of pre-marketing (typically around €10,000) is a relatively small price to pay compared to the potential wasted investment in a full launch. Even if the pre-marketing activity does not identify enough interest to justify a separate fund, it might still attract some investors to your existing structure or into a segregated managed account.

Overall, pre-marketing offers a way to gain confidence in the idea before committing significant resources. It allows a manager to make a more informed decision about whether to proceed with a full fund launch.

What are the benefits of pre-marketing before setting up a full AIF?

Pre-marketing is a great way to test the waters for your fund idea before you commit a significant amount of time and money to a full launch. 

• Lower investment: It allows you to gauge potential interest without the upfront costs of setting up and registering the entire fund. 
• Gather feedback: By talking to potential investors during pre-marketing, you can get a sense of whether there's a demand for your fund and what kind of returns they're looking for. This feedback can help you refine your investment strategy and offering before you go to market.
• Gauge confidence: This process can help you increase your confidence level in the fund's viability. Instead of jumping in at the deep end with a full launch, you can test the idea with a smaller investment and build confidence before committing a larger sum.
• Decide to proceed: The information you gather during pre-marketing can help you decide whether to move forward with the fund or go back to the drawing board. If there's not enough interest, you can avoid the time and expense of a full launch.

This approach allows US managers to enter the European market with lower risk and adapt their strategy based on actual demand.

How do you go about the pre-marketing process?

Setting up a pre-marketing agreement with a third party AIFM such as Ocorian is a relatively straightforward and simple process.  The AIFM would need to perform a basic KYC due diligence on the client through the on-boarding process.

Once approved, we would then set up a pre-marketing agreement and agree on our business terms for servicing the future AIF, if you decide to go for a launch.  In parallel, we will review your pre-marketing materials and define a process on how to approach your prospects.

Once the agreement is signed, we need to notify the CSSF in Luxembourg, or the CBI in Dublin that pre-marketing is about to commence. Once notified, we can start the agreed pre-marketing actions without additional regulatory touch points.

What is the cost and timeframe of pre-marketing?

The set-up of a pre-marketing arrangement typically takes less than four weeks and costs a standard fee of €10,000. This covers getting to know the client, legal setup, notification, and pre-marketing activities. It's also considered an upfront portion of the onboarding fees charged for the full fund launch.

What can the investment manager do under the pre-marketing rules?

Pre-marketing allows you to share more than just your firm's background and track record. You can present the actual details of the fund you're planning to launch, including things like the type of investment vehicle and its features. However, the level of detail you can provide depends on your goals.

For instance, if you're simply trying to gauge market interest, you might not need a fully fleshed-out term sheet. But you can share some key details to get a sense of what might resonate with potential investors.

It's important to note that while you can do some pre-marketing activities yourself, regulations typically require an AIFM (Alternative Investment Fund Manager) to be involved. This is because they have the authorisation to conduct pre-marketing legally.

The AIFM's role is to ensure clarity and handle any regulatory concerns potential investors might have. They will also connect investors with the fund's Investor Relations team if they have questions about the investment strategy or the fund manager's approach.

After pre-marketing, how can I go about setting up a full fund if demand is there?

After the pre-marketing is complete and assuming the fund project moves forward, here's what typically happens next:

1. Finalise fund structure: Building on structural feedback received from your prospect, in combination with legal and tax advice, the specific structure of the fund is finalised. This includes determining the client's role (portfolio manager or investment advisor) which can impact the amount of additional due diligence required.
2. Legal drafting and review: The legal team gets involved to draft the fund's offering documents. These documents are reviewed internally to ensure compliance with AIFMD (Alternative Investment Fund Managers Directive) regulations. This includes checking for ESG strategy disclosures and other relevant details. The fund's accounting team also gets involved to ensure the specific terms align with the fund structure and chosen accounting methods.
3. Setting up the fund in the system: Once the legal and accounting aspects are ironed out, the fund can be set up within the firm's internal systems.
4. Investor KYC for closing: As the fund gets closer to a first closing (bringing on its first investors), the investor KYC (Know Your Customer) team gets involved to ensure they have all the necessary documentation from potential investors.
5. Fund launch and regulatory notification: The final step involves legally launching the fund. This includes setting up the legal entities (usually a GP vehicle and the AIF) which can take some time as it requires a functional bank account (hence a separate process to be started in parallel with the above steps). Once launched, the regulatory body is notified, and an identification number is issued for the fund.
6. Marketing passport: With the regulatory greenlight, the focus shifts from pre-marketing to full marketing using the AIFM’s cross-border marketing passport. This passport allows the fund to be marketed across various European jurisdictions based on the agreement between the firm and the client.

What are the limitations of pre-marketing?

Raising capital in Europe has some limitations. Europe has a different set of regulations compared to places like Delaware or Cayman. This means dealing with a new legal jurisdiction and potentially an AIFM (Alternative Investment Fund Manager) for oversight.

However, these challenges can be overcome with the right partner. A good AIFM can help navigate the complexities of distribution, investment management, dealing with an investment committee, and KYC/AML processes. With clear communication and the right team in place, these hurdles become manageable.

Overall, while there's more work involved in raising capital in Europe compared to other locations, it can be well worth the effort if you find the right partner.

Are you interested in gauging investor appetite in Europe through pre-marketing?

At Ocorian, we have extensive experience supporting US fund managers with pre-marketing funds and 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, Isle of Man,  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.