Alternative fund managers in Europe and outside appear poised to win greater flexibility on early-stage marketing to professional investors, despite dissatisfaction with the first draft of EU legislation to amend the 2011 Alternative Investment Fund Managers Directive.
In March, the European Commission published a proposed directive amending EU regimes that regulate cross-border distribution of retail and alternative investment funds. The law is a key element of a legislative package advancing the Commission’s Capital Markets Union project, which also includes a prospective regulation intended to facilitate cross-border fund distribution.
At first, the Commission’s proposals to amend the AIFMD alarmed the fund industry, which feared they could make marketing more difficult in several major European markets.
However, following the drafting of a revised version of the legislation by the EU Council, comprised of member states, it now appears that alternative fund managers in Europe and elsewhere will win the greater flexibility they seek in early-stage marketing to professional investors.
The proposed legislation defines and sets rules on ‘pre-marketing’ activity: gauging interest from potential investors before a fund has actually been established while avoiding the full disclosure and administrative rules the directive requires for fully-fledged fund marketing.
This process enables managers to refine their investment offerings and terms, or even abandon projects if they fail to generate market enthusiasm.
What would change
The original AIFMD defines marketing but makes no mention of pre-marketing, leaving it to member states to choose whether or not to authorise it at all. Regulators including Luxembourg’s CSSF and the UK’s Financial Conduct Authority have done so, but other member states treat any initial contact with a prospective investor as marketing.
In its proposals, the Commission was aiming for pre-marketing to be permitted throughout the European Economic Area – the EU plus other counties that follow its single market regime – but under uniform rules.
While the March proposals would liberalise the rules for fund managers in countries where pre-marketing is now barred, they would impose new constraints in other states.
Most notably, they forbid the provision of offering documents or limited partnership agreements, even in draft form, to potential investors. Otherwise, the AIFMD’s full requirements governing marketing would be triggered.
Industry critics protested that the rules would prohibit established practice in the alternative investment industry. This applies especially to funds structured as limited partnerships, often the result of long negotiations between managers and cornerstone investors – whose commitment is essential to the project.
They also noted that the EU’s (now-superseded) Prospectus Directive governing the offering or listing of securities permits the circulation of draft prospectuses to professional investors.
In some cases, critics argued, the proposed directive could force managers to comply with marketing passport conditions even before a final decision to establish a fund had been reached.
Responding to industry complaints
The revised draft issued by the EU Council on June 15 is viewed by analysts as far closer to the more liberal interpretation of the marketing requirements prevalent in the union’s leading asset management and fund service jurisdictions.
The changes would permit alternative investment fund managers (AIFMs) to explore the market of prospective investors, including by circulating draft fund documents until they are finalised before a launch.
Investors would not be able to invest in the prospective fund at this point, and no subscription documents would be available. AIFMs would be required to document details of their market-testing activities and be prepared to supply them to regulators.
Under the Council’s amendments, any subscription to a fund within 18 months of pre-marketing that either referred to the fund, or was established as a result of pre-marketing, would be treated as a product of marketing and subject to notification or authorisation procedures – depending on the AIFM’s volume of assets under management.
That rule would prevent managers from using pre-marketing to obtain reverse solicitation, where participation in the fund takes place at the investor’s initiative and is thus not subject to the directive’s rules on marketing.
The Council draft also would ease a proposed requirement that managers offer to repurchase shares or units from local investors in jurisdictions where they wish to discontinue marketing their funds.
Notably, closed-ended funds are exempted from the repurchase obligation.
While the directive next faces negotiation between the Council and the European Parliament, alternative fund managers are now confident that established practice for dealing with key investors is less likely to be overturned as part of a well-intentioned liberalisation measure.