Private equity managers now face a dilemma: adopting any applicable marketing passport(s) of uncertain utility and potentially significant costs; or establishing a more cost effective platform outside the complexities of the European rulebook and navigating the marketing rules of an increasingly fragmented Europe on their own. Such managers should take heart though, the maze may not be as complex as it appears.
Any legal analysis of the marketing rules now applicable across Europe, should start with an examination of how partnerships form. A partnership is not typically a legal entity that issues securities, but rather a relationship between participants. This relationship starts with discussion and evolves over time until it crytsalises through legal negotiation into a formal business relationship. Understanding this will be critical in understanding how the new laws apply in practice.
Marketing is not the same as general ‘financial promotion’, but rather the actual ‘offering’ or ‘placement’ of interests in an established AIF, either directly by the manager or by someone on its behalf. The FCA states in PS13/5 that an offering or placement takes place only when a person makes interests available for purchase by a potential investor (which broadly constitutes a contractual offer or an invitation to treat) and, consequently, the term does not govern the provision of draft documents. The FCA’s guidance is fairly definitive on point and it would seem that much of the fundraising process in a private equity context is actually out of scope, in the UK at least.
This may seem helpful; however, an AIF must still admit partners at some stage (putting aside questions in relation to when a partnership is actually formed and the rules crystalise). At this point, industry is often presented with a rather bifurcated choice: (i) ‘enhanced’ private placement; or (ii) reverse solicitation. Unfortunately, neither is wholly satisfactory. This is because private placement has been goldplated in key jurisdictions and it may no longer be practical (SJ Berwin further comment). Reverse solicitation on the other hand, which would appear entirely suitable for private equity fundraising, is viewed as politically sensitive by some. This is notwithstanding its established use and quite explicit guidance from the FCA stating that managers may generally rely on a confirmation from a partner that an approach is at its own initiative. Where the partner is legally represented, then the grounds for challenging the validity of the FCA’s analysis would seem narrow.
A broad range of alternative approaches exist in reality, but the most obvious perhaps is limiting ‘marketing’ or ‘closing’ activities to those more liberal jurisdictions that raise the fewest obstacles or simply perhaps, the domicile of the fund. This can easily be achieved through the use of clear ‘marketing’ protocols and a more formal closing process, and the savings involved in adopting such a pragmatic approach could well be considerable. There should be no need to ‘market’ extensively on a cross-border basis within Europe and institutional investors are typically international anyway. In an institutional environment, therefore, the relevance of retail-type marketing restrictions is less certain. Any ‘gaps’ that emerge should not be seen as abusive, but rather the logical outcome of a one-size-fits-all regime based on a retail (i.e. UCITS) framework being applied in an institutional environment.
This type of analysis may become acutely necessary, because, the concept of a marketing passport is unsound in a private equity context. It assumes that managers fundraise by making an open offer to potential partners to participate in a partnership, which such partners accept or reject on the basis of pre-approved, static documents. This misunderstanding (that overlooks the individual negotiated and relationship driven nature of partnerships) is likely to undermine the effectiveness of any passport in practice, (as there is no general offering), and this is to the extent that passporting is not otherwise beset by operational complexities and, as we now learn, additional regulatory fees.
Once the concepts embedded within the AIFMD become clear, navigating the marketing maze may prove a lot easier than feared for those smaller and third country managers that do have immediate access to a passport. In fact, they may prefer the simplicity of ordinary partnerships to the complexities and uncertainties of the rather prescriptive European products now being offered. We shall see.
Click SJ Berwin to see their comments.
Click Mourant Ozannes to read their summary of AIFMD
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