US fund managers can tap growing investor appetite in Europe and the Gulf Cooperation Council (GCC) if they can navigate regulatory and structuring challenges, explains Marc van Rijckevorsel and Pascal Loscheider.

Opportunities for US fund managers looking to raise money from European investors

There's currently a lot of capital available for US fund managers in other jurisdictions. Alternative assets surged in 2021, with record levels of fundraising, investment, exits, and performance across many asset classes. This is set to continue, with Preqin forecasting assets under management to grow from $13.32tn today to $23.21tn in 2026. Almost half (49 per cent) of that 2026 figure is expected to sit with private equity and venture capital, whilst Europe's alternatives market is predicted to grow at 14 per cent year-on-year to 2026.

There is clearly strong demand for raising and investing capital. However, historically many US fund managers have focused on US LPs. Yet, as the private equity market has matured and more investors have entered the asset class, there is a growing number of investors in Europe and the GCC region who have capital to deploy and are interested in identifying specialist fund managers.

We see more and more US fund managers setting up fund structures in Europe. Luxembourg is the jurisdiction of choice as the largest investment fund centre in the world outside of the US, followed by Ireland which may expect increased interest following positive changes in its investment limited partnership (ILP) regime.

Challenges for US fund managers

The challenges that arise obviously relate to the regulatory perspective: US fund managers are very familiar with the SEC rulebook but once they get to Europe, they need to appreciate that they are not dealing with one market, even though AIFMD is creating a level playing field.

It is also important for US managers to consider how they incorporate ESG principles into their operations and investment decisions. European investors and regulators are increasingly focussed on managers' commitments to ESG, evident in the introduction of the EU's Sustainable Finance Disclosure Regulation in March 2021, with a second phase expected in early 2023.

Although there is a legal framework for funds at EU level, there is gold-plating in different EU member states so there are different requirements when it comes to setting up funds and marketing funds. This is something US managers often struggle with when raising capital in Europe for the first time. New entrants to the European fundraising market need professional advice to navigate the process. For managers that don't have offices in the EU, we can provide a broad range of administrative, fiduciary and compliance services through our third party AIFM and management company.

New AIFMD regulation presents challenges for fund managers on pre-marketing rules

AIFMD introduced rules to regulate the pre-marketing of alternative investment funds on 2 August 2021. The big advantage of this new pre-marketing directive is we now have clear guidance on how to undertake pre-marketing activities across the EU. Of course, before it was implemented there was already market testing, but there was no clear legal framework. Any activity that could be considered as pre-marketing was not defined in the original AIFMD and was left to the rules of the individual EU member states. That has now been clarified.

The new pre-marketing rules restrict pre-marketing activities to some EU regulated entities (investment firms, credit institutions, regulated AIFMs and UCITS management companies). This restriction is often a burden as in the past, testing the interest of potential investors was mostly done by (unlicensed) initiators of funds before engaging an EU-AIFM. However, we offer a service where we do the pre-marketing notification and conduct the pre-marketing activities with fund initiators.

For US fund managers without experience, there was a discrepancy between jurisdictions in the EU as to what counted as pre-marketing, and that has now been defined. What's good to know is that US fund managers can test whether there is appetite for a fund strategy, and there is a process for doing that without having to set up a fund structure from the start. If a US fund manager intends to test an investment idea of an investment fund with European investors, they can appoint an EU-AIFM to do the pre-marketing notification to local regulators. If there is little appetite, the manager can stop pre-marketing and they are not obliged set up a fund or incur many costs. There's now much more clarity about that process.

The road ahead

The private capital environment continues to grow in popularity and large fund managers are tapping into new investor bases all the time. Most US fund managers see growing competition for capital and are looking to expand their investor bases into Europe and other regions such as the Gulf Cooperation Council (GCC) nations - both markets will continue to present compelling opportunities.

Regulatory challenges are the biggest issue for US managers looking to fundraise in Europe, with managers facing different challenges in accessing capital and marketing their products. In Europe, US fund managers will benefit from working with the right service providers, whether those are legal advisers, placement agents or fund administrators.

Supporting fund managers to raise capital

As a fully licensed AIFM, Ocorian Fund Management can be appointed through a marketing agreement to facilitate the pre-marketing of your AIF to LPs and other possible investors in the EU and the UK. This ensures that when your fund project is realised, all marketing activity has been captured and regulators will be notified. Combined with our fund administration and AIF depositary capabilities, we can provide a true end-to-end solution to help fund initiators realise their investment strategies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.