comment - 07 October 2015

EU marketing – can a third country passport compete with hybrids?

Indeed, a mixture of National Private Placement Regimes (NPPR) and the possibility of hybrid onshore / offshore funds already provide third country managers with the full range of marketing options if the increasing complexities of operating within the EU seem unattractive.

Under the original AIFMD timeline, it was anticipated that a third country passport would be introduced during the course of 2016. Following the release of the ESMA advice on this subject in July this year, which effectively recommends to the Commission that the introduction of such a passport should be delayed (see here for more detail), it seems increasingly unlikely that this timeframe will be adhered to and for as long as this situation exists; out of scope managers must continue to rely on the availability of NPPR.

Whilst this may not appear to be an ideal situation, it may not be as bad as it seems. Irrespective of whether the third country passport materialises sooner or later, it has already thrown up a number of issues. Perhaps the most notable surround the unresolved questions of (i) abolishing NPPR for sub-threshold managers, with Germany’s early announcement that it intends to dispense with NPPR on implementation of any third country passport appearing premature, and (ii) determining the Member State of Reference (MSoR) in situations where marketing is proposed in multiple Member States. Under AIFMD two approaches are specified for determining the MSoR, neither of which seems particularly practical. In certain cases the MSoR is determined by reference to a specified procedure and in others, by reference to the concept of ‘developing effective marketing’. In both cases a lack of clear guidance on the procedure means that there is a real danger that even if the passport is introduced, the timing (and costs) associated with determining the MSoR will make its use impractical.

In addition to this there are the additional issues of equivalence and double regulation. Any manager wishing to avail themselves of the third country passport will have to be based in an ‘equivalent’ third country (currently as determined by ESMA in their July advice) and must subject themselves both to EU regulation (under AIFMD) and to any relevant third country regulation. Whilst this may be acceptable for some larger and more successful managers, others will doubtless not be willing to accept this position, which on the face of it is truly inequitable.

None of this is ideal when anecdotal evidence suggests that a mixture of pre-investment, reverse enquiries and NPPR are working relatively well for most sponsors and there is little need for third country managers to establish an EU AIF. Moreover, the development of hybrid funds, as anticipated by Aztec’s ‘bright solution’ (see here for more detail), means that third country managers can access the European marketing passport already. A passport is important not just because of the third country marketing restrictions adopted by certain Member States, but because passportable funds increasingly enjoy preferential regulatory treatment under EU and national rules relating to pension funds, insurance groups, banks and other investment vehicles.

The aim of Aztec’s ‘bright solution’ is to use hybrid technology to help European investors access third country managers which do not wish to market in the EU. In offering this solution Aztec has established Aztec Risk Management which, following authorisation by the FCA, should enable a third country manager and investors to establish an AIFMD compliant pool that can be operated alongside the principal fund at little additional cost and without a standalone fundraising exercise. With this solution, it is hoped that international marketing activities can carry on unaffected and to the extent that an EU investor wishes to commit, Aztec can liaise with the relevant investor directly to facilitate this; any additional costs being limited to the EU investors that benefit directly from investing in a passportable product. After all, international (and other ‘good’) investors should not bear these costs.

The ability to market and access funds is critical for industry and there can be little doubt that the status quo provides a spectrum of solutions to meet all needs. The AIFMD does not operate in the simplistic, binary manner that some fund associations like to present. In this context, therefore, industry should look critically at any third country passport in the future and consider whether better options already exist. They are likely to do so.


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