SS&C GlobeOp took part in an engaging panel discussion at SS&C Deliver 2019 on how US fund managers can access European capital. SS&C GlobeOp's Liam Woods, Director – Business Development, EMEA, joined me on the panel, along with Derek Delaney of DMS and Robert Mirsky of EisnerAmper.
Why should US fund managers consider fundraising in Europe?
The numbers suggest that the European asset management landscape is in good health. For managers looking for new sources of capital or diversification of their investor base, Europe is a very compelling region.
Preqin research suggests there are upwards of 3,000 active investors in Europe today, allocating to a broad range of strategies. Popular strategies such as mid-market private equity, infrastructure, and private credit are enjoying particularly strong success with continental pension plans and financial institutions.
Importantly for those willing to take on Europe, the rewards can be significant. Institutional investors typically write large tickets—an investment of €50m – €100m is not uncommon. Such institutions are required to diversify their allocations geographically, which means the appetite to allocate to non-European-Union (EU) managers is certainly there.
What should US managers consider when targeting Europe?
It is important that US firms approaching Europe develop their strategy carefully by considering which jurisdictions and which investors they are targeting as the most likely sources of capital. Not all countries in Europe have harmonized requirements for fund marketing, so an appreciation of those that are most accessible can go a long way.
It is also worth considering the requirements for non-EU European countries such as Switzerland and Norway. Both have significant investor wealth and fall outside EU regulations such as the Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive (MiFID), and therefore have different barriers to entry.
Essentially there are three routes to fundraising:
- Reverse solicitation
The investor must contact the fund manager directly without any form of solicitation on the part of the fund manager. Solicitation can even include having a company website stating the funds exist, so this comes with a high barrier to entry.
- National Private Placement Regime (NPPR)
Certain countries still allow non-EU funds to register directly with local regulators to market—and importantly, to pre-market—funds. The UK and Germany are good examples of countries that permit this.
- Regulatory passports, such as AIFMD
To access a regulatory passport, fund managers must “prove substance” (i.e., have a physical presence) in the EU and abide by the EU regulations as conferred by the passport. As not all managers wish to have “boots on the ground” this is not for everyone. Gladly, solutions exist via third party Management Companies that provide substance for the non-EU manager. In theory, the passport allows the fund to be freely marketed across the EU. In practice, however, some local requirements still need to be met in certain countries.
While the EU is considered one region from a regulatory perspective (such as for AIFMD or MIFID), numerous EU countries have their own requirements for marketing funds, and they certainly have their preferences in terms of asset classes.
What are the key trends we’re seeing?
At SS&C, we are seeing extensive use of third party Alternative Investment Fund Managers (AIFM’s), to provide the “substance,” and therefore access to the EU marketing passport. As well as access, this gives the fund manager a partner that understands the region and can do some of the heavy lifting. Relying on the NPPR or reverse solicitation is becoming less common as both increasingly restrict the manager’s ability to access key investors. This is especially true for first-time funds, as it’s near-impossible to cite reverse solicitation when you’ve just set up.
For those investing into Europe, parallel structures to those of funds in Cayman and Delaware are commonplace. Given investor requirements for European funds, and tax concerns in local markets, having a standalone fund (an LP in Luxembourg for example) allows the manager to raise capital and invest in Europe in a more efficient manner.
In terms of strategies, European investors have been weighting their allocations to longer-term strategies, potentially as a diversification play should a market slowdown occur. Hedge funds still receive a large proportion of the allocation; market-neutral strategies that offer some downside protection seem appealing. Credit also continues to be popular. Private credit strategies in particular have seen large inflows as investors reallocate their more transitional fixed-income buckets to the more illiquid end of the spectrum. In keeping with global trends, mid-market private equity continues to impress and has had active interest from major investors in key domiciles such as the UK, Switzerland and Germany. Real estate—typically a favorite of conservative European investors—is also worth a mention, having kept pace with past allocations as predictable low-risk low-return income is valued in volatile markets.
