Setting up a fund in Europe can seem complex. In the first event of our Private Fund Industry Live series, our panel of experts decoded and gave their views on the European fund environment
US private capital fund managers are coming to Europe as a means to expand globally.
Some view a European fund structure not only as a way to access investors from Europe, but also a way to roll out their investment strategies across the world, according to Gilles Dusemon, Partner at Arendt & Medernach.
Speaking on the panel for the first in our series of Private Fund Industry Live events, Gilles said: “What we have seen over the last few years is that many [US fund managers] are going to Europe to deploy their investment strategies globally. They see Europe as a global ticket.”
He said it had become easier to attract global investors into a European fund vehicle than into an offshore one.
“Regulation was once seen as something to avoid; now it’s viewed as a driver of a good, safe and sound product,” he added.
The EU regulatory landscape can seem hard to navigate. It is possible for non-EU managers to reach European investors without creating a European fund structure. This option involves complying with the National Private Placement Regime, in accordance with Article 42 of the Alternative Investment Fund
Managers Directive (AIFMD). But there is a regulatory limitation to how far and where you can go via this route.
If a fund manager decides this isn’t the right option and they want to set up a European fund, they must decide where to domicile it.
Luxembourg and Ireland are the main gateway jurisdictions, offering equal merit, according to Gilles. He said deciding which to choose would be influenced by where investors are located, as well as cultural, legal and technical factors. Both can be regarded as key hubs for fund management and administration for managers from outside of Europe. A fund manager also needs to decide whether the European structure will be a feeder for the US flagship fund or a parallel fund.
Gilles said: “What is important to know if you go for a feeder is that you will not benefit from the passporting regime that exists in Europe. If you opt for a parallel fund you can get full passporting rights under the AIFMD framework, but it also means you are fully entering the European regulatory environment.”
A parallel fund will also require the fund manager to appoint an authorised AIFM, who can activate the marketing passport to provide access to the EU to raise funds.
Many US managers coming to Europe rely on a third-party AIFM to fulfil their regulatory requirements. There are a number of important factors to weigh up when deciding which one to hire, according to David Sarfas, Head of Private Capital at Intertrust Group, who was also on the panel.
He said: “You need to do appropriate due diligence on the firm that’s going to provide third-party AIFM services. Meeting the team that’s going to be doing the work, that’s probably very important.”
He said managers also need to understand how the team operates, its interpretation of the local rules and regulations, and its experience of the asset class of the fund you are setting up.
He added: “An AIFM that operates within the same asset class will be able to guide and help the fund rather than discover it with the fund.”
The type of fund structure will depend on the kind of investor the fund manager is targeting.
Gilles said: “There’s a comprehensive toolbox of structuring solutions in both jurisdictions which will allow you to pick and choose the right fund entity and regime based on the target investors and target market you want to go into.”
For example, in Luxembourg, on the regulated side there is the SIF (Specialised Investment Fund) and SICAR (Investment Company in Risk Capital).
On the non-regulated side there is the Reserved Alternative Investment Fund (RAIF) or the special limited partnership (SLP).
Gilles said: “You need different solutions for different types of investors, hence why these fund structures have been developed over time. It means that managers can pick the most suitable, most flexible, fiscally optimal legal structure to accommodate different types of investors.”
In February of this year, long-awaited changes were made to the Irish Investment Limited Partnership (ILP) legislation.
Niamh Ryan, Partner at Simmons & Simmons, said: “It was 25 years old so in need of modernising. We really needed a partnership vehicle that was fit for purpose.”
Coinciding with amendments to the ILP legislation, the Central Bank of Ireland also updated its rules for closed-ended funds to enable them to utilise the type of private equity terms expected by investors and managers.
Niamh said: “The update to the ILP legislation was significant; but actually what was really important was the Central Bank of Ireland’s updated rules for closed ended funds which issued at the same time as the ILP update, so we could ensure there was a partnership vehicle that would work, particularly for the private equity-type assets and for those managers.”
While there is a wide range of structuring solutions to suit every fund manager’s needs in Europe, the most important consideration when setting up a fund is the end investor, Niamh said.
“There is little point in spending time and money on setting up a vehicle either in Europe or setting up a vehicle that you’re trying to sell globally if the investor can’t invest in it – whether that’s for their own regulatory reasons, or
because the vehicle doesn’t work from a tax perspective or they simply don’t want to invest in it.
“Ultimately, all roads lead back to the investor,” she said.
The attraction of US fund managers to well-regulated jurisdictions in Europe, such as Luxembourg and Ireland, comes amid expectations of growth in the private capital market. By the end of 2025, private equity assets under management are expected to more than double to $9.11 trillion from $4.41 trillion in 2020, according to Preqin.
David Sarfas said:
The landscape in Europe is very vibrant in terms of transactions and also in terms of structure and investors. So if US funds want to come and raise capital from a new pool of investors, it’s clearly a go-to location today.