AIFMD and Asian fund managers

18 June 2015

Written by Raymond Page

Smaller private equity funds face a regulatory nightmare in recruiting European investors, says International Administration Group’s (IAG) Raymond Page.

A Hong Kong fund manager approached us recently looking to raise capital in Europe. He was trying to decide whether it was worth his time grappling with the rules laid down in the EU’s Alternative Investment Fund Managers Directive (AIFMD) or better to rely on ‘reverse solicitation’, whereby an investor actively seeks out the fund manager without having been solicited in any manner.

Although Asian fund managers raise the majority of their funds locally or from US investors, a significant minority still like to have European investors. However, for some of the smaller private equity funds – in particular venture capital – the regulatory and legal costs associated with AIFMD can prove prohibitive.

Indeed, so demanding and arcane are its provisions that one fund manager described Europe as a “basket case”. Unless the authorities can simplify and streamline their regulations, he said, Europe will lose out. Many European family offices and funds of funds are finding a work-around by setting up an Asian office, with Singapore currently the most popular destination.

For those Asian fund managers that do not take this route to market, a lack of consistency in the way rules are applied has virtually closed off some countries, such as France, Spain and Italy, while Germany is regarded as complex.

Perhaps the European Securities and Markets Authority’s consultation on extending the passport system to allow non-European managers to register funds will remove the barriers. The European Private Equity and Venture Capital Association is pushing for a simpler process and the outcome of this consultation is expected later this summer.

Meanwhile, the UK’s private placement facility is an attractive option for Asian fund managers as it is viewed as the most straightforward market in which to raise funds. As an alternative to navigating the National Private Placement Regimes, Asian fund managers typically appoint agents for full AIFMD and passport and depositary services.

European-based managers can, in certain circumstances, provide the much needed regulatory permissions to enable marketing. Indeed, ‘rent a manager’ is the new mantra for Asian fund managers. For many, AIFMD also offers a level of protection for both investors and their fund managers.

Some are concerned about regulatory risk while others feel reassured that, if the fund is marketed correctly, all parties are protected against any future legal suits should a fund fail. Marketing a small fund – for example £250 million – into Europe shouldn’t be a problem for most Asian fund managers because most of the regulatory and financial information already rests with the fund administrator.

In our experience, appointing an administrator such as IAG who can also provide depositary services and assist with registration and other regulatory aspects is by far the easiest way for Asian fund managers to recruit and integrate European investors.

The private equity industry has a duty to do all it can to help smaller fund managers raise funds and in doing so make all of Europe, not just the UK, open for business.

Raymond Page, director of IAG and one of the senior management team of the Guernsey business, has moved to Singapore as managing director of its joint venture, Tricor IAG Fund Administration (Singapore).

An original version of this article was published in BVCA Journal, June 2015.

Download Find a related practitioner