Luxembourg-based Ocorian’s global head of alternative investment fund management services, Thomas Fahl, discussed the challenges and strategies for non-European fund managers to successfully enter the European Union market through effective pre-marketing in an interview. Ocorian, which has a team of 173 in Luxembourg as of June 2024, with 75 dedicated specifically to investment funds, provides services across various alternative investment asset classes, including private equity, venture capital, infrastructure, real estate, debt, reserved alternative investment funds (Raifs) and funds of funds.
Kangkan Halder: What are the primary challenges for non-European fund managers looking to enter the European market?
Thomas Fahl: Our latest research amongst 100 senior executives at alternative fund managers in the US and Canada shows that their key concerns start with, yes, you guessed it, regulation… all North American fund managers (99%) surveyed find EU regulations more complex compared to those in their home jurisdictions.
While this complexity can be off-putting, specialist legal and compliance expertise is widely available to navigate this landscape, though it requires time and resources. The EU pre-marketing directive imposes strict rules on how and when fund managers can engage with potential investors in the EU before a fund is officially launched. However, with the right partner, this is easily navigable.
With strategic planning, local expertise and a proactive approach to compliance and regulatory changes, none of the perceived challenges need prove to be obstacles. The European market remains an extremely attractive destination due to its size, available capital and investment opportunities, making the effort to navigate any perceived or actual challenges worthwhile for fund managers.
Pre-marketing activities are typically restricted to qualified investors, ensuring that only experienced parties are engaged
Can you explain the pre-marketing process and its significance in entering the European market? Are there specific benefits associated with pre-marketing?
Pre-marketing is a critical stage for fund managers seeking to enter the European market. Occurring before a fund’s official launch, it serves as a strategic period for gauging investor interest and refining the fund’s strategy based on initial feedback. Understanding the pre-marketing process and its significance can provide fund managers a competitive edge in navigating the complex European investment landscape.
Key activities during pre-marketing include presenting the fund’s proposed strategy to potential investors, gathering feedback to refine the strategy, and establishing the fund’s brand presence and credibility. It is essential to distinguish this phase from the formal marketing of the fund, as they are governed by different regulations within the EU. Pre-marketing activities are typically restricted to qualified investors, ensuring that only experienced parties are engaged.
Engaging in pre-marketing offers several benefits, such as gaining valuable insights into investor preferences, navigating compliance issues more effectively, building the fund’s brand, fine-tuning the strategy and enhancing the fund’s credibility. The associated costs and timeframes of pre-marketing are significantly lower compared to setting up a full fund.
Esma guidelines ensure that pre-marketing materials are clear, fair and accurate to avoid misleading potential investors.
What activities are encompassed by pre-marketing rules, and what role does an AIFM play in this process?
Pre-marketing involves activities conducted before a fund’s official launch to gauge investor interest and test the investment strategy’s feasibility. During this phase, the fund is not yet incorporated and no formal agreements are signed. It’s essential to differentiate pre-marketing from marketing within the EU, as different regulations apply.
Under the cross-border fund distribution (CBFD) rules, pre-marketing can include teasers, presentations and pitch books. However, there are strict limitations. Investors must not receive enough information to subscribe. Subscription forms, in draft or final form, cannot be provided. Final constitutional or offering documents for an unestablished alternative investment fund (AIF) must not be shared.
The European Securities and Markets Authority (Esma) guidelines ensure that pre-marketing materials are clear, fair and accurate to avoid misleading potential investors. Only regulated entities can perform pre-marketing activities, such as an authorised alternative investment fund manager (AIFM), like Ocorian.
After completing pre-marketing activities and assessing demand, what are the next steps?
Once you’ve completed pre-marketing activities and assessed demand, first you decide whether to proceed. Check if your commitments meet the minimum target and make sure they align with your fund’s strategy.
Next, hire experienced legal counsel to draft essential documents like the private placement memorandum and limited partnership agreement. Then, appoint service providers. Get a fund administrator for back-office operations, a depositary for safeguarding assets, and auditors and tax advisors for financial transparency. Set up the fund by finalising its legal structure, obtaining regulatory approvals, and opening bank accounts. Establish operational procedures for capital calls and distributions.
Then, focus on marketing and investor relations. Update potential investors on the fund’s progress and refine your marketing materials. Engage with investors through roadshows and meetings to convert soft commitments into firm ones. Finally, ensure your team is ready and implement necessary systems for fund operations, compliance and performance tracking.
What exactly are the pre-marketing limitations?
Pre-marketing in Europe is great for gauging investor interest, but regulations are tight–you can’t share specifics about your funds yet. Plus, every country has its own rules. The key to navigating this–compliance first–get legal counsel on board. Then, focus on strategic communication to talk about your investment approach, the market outlook and your expertise. Finally, leverage technology and local partnerships.
Could you provide a use case illustrating pre-marketing from non-European clients?
We have recently engaged with a North American private equity manager who wants to diversify their investor base and are considering Europe for their next private equity fund. We explained the trigger points for pre-marketing, and then they crafted a teaser document, adhering to regulatory requirements. Ocorian, as an AIFM, took care of notifying the Luxembourg regulator about the pre-marketing activities to ensure adherence to AIFMD regulations. Ocorian then provided interested investors with a deeper understanding of the fund’s strategy and objectives. This pre-marketing dialogue fostered valuable connections, paving the way for successful fundraising.
