21 May 2015

PEGCC: Buyouts - Want to market in Europe? Here’s what you need to know about AIFMD

The AIMFD may force US GPs who want to raise money in Europe to establish a regulated financial institution in each host country. Or GPs may need to set up a European entity under AIFMD to benefit from a fundraising program that’s still taking shape. Neither option is particularly easy or cheap.

ESMA is now weighing comments on a proposed passport program to allow non-EU investment managers to fundraise throughout Europe. The idea is to let a qualified investment firm shop for capital throughout the EU once it meets AIFMD guidelines. ESMA is due to submit to the European Commission by the end of July an opinion on the EU passport under AIFMD and how non-EU firms will market alternative funds. Final ruling on the passport regime may take place in the fourth quarter.

The passport program is supported by two of the private equity industry’s most powerful lobbying groups, the European Private Equity & Venture Capital Association and the Private Equity Growth Capital Council. “There are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk that would impede the application of the passporting regime to US managers,” PEGCC CEO Steve Judge said in a comment letter to ESMA.

Judge said US GPs have long been marketing in the European Union and the nature of the US regulatory regime is rigorous, including the ability of the US Securities & Exchange Commission to monitor systemic risk. “Not extending the passporting regime … would raise significant and important market access issues for US alternative investment fund managers and could seriously harm the interests of European institutional investors,” Judge said.

Ultimately, the cost of compliance for AIFMD could be impacted depending on how strict the ESMA recommendation is on the passport program. But any specific financial impact on firms is hard to quantify at this point, observers said.

The PEGCC also supports the establishment of a national private placement regime in each European jurisdiction. It’s seen as a way to allow GPs flexibility to market to just one or two European countries without getting an AIFMD passport. “We’re hoping that the passport is extended in a manner that allows funds managed by US PE firms to be marketed in Europe with the greatest ease possible,” said Jason Mulvihill, general counsel for PEGCC.

Under AIFMD, when a fund acquires control of an unlisted EU portfolio company, the non-EU fund manager will be required to use best efforts to prevent distributions, capital reductions, share redemptions or the acquisition of its own shares by the portfolio company – also known as stripping assets. Payments to effect a distribution to shareholders must come out of distributable profits. Also, the portfolio company’s net assets have to remain at or above the level of subscribed capital plus non-distributable reserves after the distribution.

“In terms of fundraising in Europe, you currently have two options as a US manager: Either you comply with the relevant rules in each European jurisdiction where you wish to raise funds or you set up a European entity to benefit from the European passport, but this requires compliance with cumbersome requirements, including in terms of risk-management. It’s a regulated financial institution that you have to set up,” said Roel Valkenborgh, European compliance officer at Riverside Co. While Riverside Co maintains a presence in many European countries to help with deal sourcing, it has formally registered for fundraising in the U.K. alone.

Another possible way to raise money from European LPs is through reverse solicitation. For example, a European LP in a previous GP fund may reach out to the same buyout firm to receive marketing materials. This method remains subject to debate among players in various jurisdictions under AIFMD. It also won’t allow a GP to work with new LPs.

The passport program for non-EU managers, due in the fourth quarter of this year, allows overseas GPs to become AIFMD authorized. Once that’s up and running, AIFMD will be up for review in 2018.

 

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