Five things to know about setting up a fund in Europe

Why set up an alternative investment fund (AIF) in Europe?

Quite simply, to follow the money.

Europe is the second largest private capital market in the world and boasts around 25% of the limited partner (LP) base for established managers. European LPs have the most liquidity of any region globally.

With a need to grow and increased competition at home, it’s no surprise that US managers, among others, are turning to Europe. But when they do, they face an environment that is significantly different from those they may be used to. The regulatory landscape in Europe can give the impression of being overly complex and burdensome, especially when viewed from abroad.

It’s true that European rules can be complicated (and there are legal and regulatory nuances between countries, even within the EU), but forewarned is forearmed for US managers and anyone else wanting to launch a fund or raise capital in the region. In this guide, we provide an overview of the fund start up process and shine a light on the regulatory landscape, the key features of the most relevant jurisdictions and the crucial role of the service provider ecosystem.

Five things to know before setting up alternative investment funds in Europe

So, if you’ve decided to set up a fund in Europe, here are five key elements to understand before you go any further:

1. There is one AIFMD to rule them all

When it comes to AIF regulation, it’s easy for outsiders to feel lost in a blizzard of acronyms. The most important one for real asset managers is the Alternative Investment Fund Managers Directive (AIFMD), the legislation that governs alternative market activity in the EU.

AIFMD sets the standards for marketing, delegation, risk monitoring and reporting in much of Europe. If you’re marketing to EU professional investors, you’ll need an Alternative Investment Fund Manager (AIFM) to ensure compliance with AIFMD.

2. Three key routes to distribution

There are three main distribution routes for alternative asset managers in the EU, governed by AIFMD alongside the Cross Border Fund Distribution Directive (CBFD amends AIFMD rules on marketing AIFs to professional and retail investors) and the more recent ESMA guidelines which set expectations around pre-marketing communications:

• Passporting

If asset managers base their fund in the EU and employ an EU-authorized AIFM, they can use the latter’s marketing passport to undertake distribution activities across the bloc.

• The National Private Placement Regime (NPPR)

The National Private Placement Regime (NPPR) allows AIFs and managers based outside the EU to market to individual member states separately. Be aware that Europe is not a homogeneous bloc and requirements around NPPR differ from country to country, with some countries not permitting it at all.

• Reverse solicitation.

Reverse solicitation is when an investor approaches a fund or its manager. In this case, other rules don’t apply. However, funds have to be able to show that the reverse solicitation was genuine, and not the direct result of marketing or advertising, which is becoming increasingly difficult as regulators are keen to limit the extent of reverse solicitation for monitoring purposes.

3. There are big differences between jurisdictions

It’s possible to domicile a fund in any European nation, but in reality, the main contenders when you are seeking to sell into multiple countries – i.e. cross border – are Luxembourg, Ireland and to an extent the Channel Islands. Luxembourg and Ireland in particular are set up for the regulation and administration of cross-border funds.

The Channel Islands are not in the EU and are considered an offshore jurisdiction but are useful in certain circumstances.

Theoretically, you could domicile a fund in France, Germany or elsewhere, but that would only be beneficial if you were limiting distribution to domestic investors in those jurisdictions.  

4. Consider your investors’ needs

When you’re thinking about where to domicile your fund and what structure it might take, the first thing to consider is who your investors are likely to be.

Where are they from, what are their priorities and what are their red lines? Answer these questions first and then work backwards from there.

Once you know your distribution strategy, you can start to think about cost, timings and operational details.

5. ESG is important

ESG (Environmental, Social and Governance) considerations are important in Europe, and managers entering the region for the first time should be familiar with relevant regulations (in particular the Sustainable Finance Disclosures Regulation, or SFDR). European investors and regulators increasingly ask for reliable data and transparent reporting on ESG metrics.

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.

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