A SECURITIES SERVICES PUBLICATION

MARKETING FUNDS IN EUROPE: OPPORTUNITIES AND CHALLENGES FOR ALTERNATIVE INVESTMENT FUNDS AND UCITS

Marketing Funds in Europe:Opportunities and Challenges for Alternative Investment Funds and UCITSGiven the wealth of investment opportunity still available stateside, why look to Europe? This was the topic of discussion at the March 2, 2016 presentation “Marketing Funds in Europe: Understanding the Opportunities and Challenges for Alternative Investment Funds and UCITS,” held at the Harvard Club of New York. Representatives from BNP Paribas, DMS Offshore Investment Services, Dechert LLP and Juniper Place LLP considered the various strategies for raising capital in Europe, including best ways to target EU investors, routes to market such as UCITS and AIFs, as well as the benefits of enlisting third-party support.

As a source of investment capital, Europe remains a powerful beacon of light. Closing out 2015, EU‑based AUM stood at $14.2tn, more than twice 2008’s total, with a growth rate north of 11 percent. As companies continue to trim excess fat, EU capital‑market returns are likely to outpace those in the US over the near term, while the weaker euro against the dollar will serve to underpin export strength. Investors are also expected to benefit from more generous dividends as well as lower valuations going forward.

Interested parties have a number of different routes to market, from fully registered approaches (either UCITS or AIF) to national private placement regimes (NPPR). The Undertakings for Collective Investment in Transferable Securities (UCITS) directive, for instance, provides managers with a “passport” to market open‑ended funds to retail customers throughout the EU. Though mainly limited to traditional approaches, funds that employ strategies such as long‑short or qualifying collective investment schemes that meet UCITS guidelines regarding diversification, leverage and risk management may still be eligible.

For non‑traditional firms there’s the Alternative Investment Fund option (AIF), which, under the purview of the Alternative Investment Fund Managers Directive (AIFMD) requires that alternative managers in Europe maintain robust operational transparency on behalf of investors and regulators. This includes frequent and detailed reporting on investment practices, executive‑compensation disclosures, and other critical data. As the application of AIFMD can differ from one region to the next, firms that operate in multiple jurisdictions will need to be aware of specific rules within each of the participating member countries. Accordingly, alternative‑investment fund managers (AIFMs) may find it advantageous to seek third‑party marketing and compliance assistance as part of their EU exploration.

¡ 2 ¡

Tapping into EUSo how does one properly access this thriving marketplace? The simple answer is there is no simple answer, as the rules vary depending on whether one has a UCITS registered for local sale, a non‑locally registered UCITS, a European AIF or a non‑EEA AIF.

As noted by Peter Astleford, partner and co-chair of Dechert’s global financial services group, failure to follow the correct marketing procedures could have dire consequences, including prison, fines, having one’s contract revoked and/or compensatory damages paid, not to mention the possibility of fines levied and unhelpful publicity circulated by local regulators.

Obtaining a passport is an excellent way to allow firms to avoid such calamities, said Astleford. Option one involves registering as a UCITS established in the European Economic Area (consisting of the EU plus Norway, Iceland, Switzerland and Liechtenstein) and the fund is then freely available to any EEA investor when registered locally.

“UCITS offers a number of attractive marketing opportunities, including the ability to register with rights to sell on a privileged basis across additional markets such as Hong Kong, Singapore, Taiwan, Chile and

other regions,” Astleford said. There are some notable caveats, however, including restrictions on certain types of investment strategies, as well as the need to offer investors daily (or at least bi‑weekly) liquidity.

If the UCITS restrictions cannot be achieved, then generally speaking most European Alternative Investment Funds or ‘AIFs’ are passport‑eligible (exceptions being investment

managers with AUM under €100m or where a fund has 85% plus of its assets invested in one or more non EEA funds). In addition AIFs can often utilize private‑placement exemptions, said Astleford.

Under certain circumstances reverse solicitation—a.k.a. “passive marketing” (i.e. where the investor contacts the manager)—may also be used as a gateway to the EU; however, it is a method of last resort and therefore should not be viewed in the same light as deliberate use of a passport or private placement exception, Astleford added.

“A non‑solicited approach does not involve marketing—that is, investors access the fund manager, rather than the other way around.” Firms that go this route should have air‑tight compliance measures along with a clear and verifiable paper trail, Astleford said.

Peter Astleford, co-chair of Dechert’s global financial services group, has more than 25 years’ experience in providing advice to fund managers, banks, brokers and corporates with regard to financial services regulatory work and onshore and offshore funds. He has advised on structuring and cross border business in many jurisdictions.

¡ 3 ¡

“UCITS offers a number of attractive marketing opportunities, including the ability to register with rights to sell on a privileged basis across additional markets...”

Opportunity knocksPost‑crisis regulatory changes have profoundly impacted the industry at large, at times producing unintended consequences, remarked Paul Harvey, founder & CEO of Juniper Place LLP, an investor intelligence and European private-placement firm. “For one, the supply‑demand characteristics of the distribution landscape have shifted dramatically, and the result has been a dearth of high‑quality US‑located product for EU investors,” says Harvey. Thus, for those with viable strategies, opportunity knocks, says Harvey, including the potential to bring added diversity to one’s client roster.

“We recently spoke with a manager whose $3bn fund consisted almost exclusively of US public pension assets,” remarked Harvey. “While these are obviously very high‑quality clients, they are nonetheless all of one type, and tend to move as a pack. The point being that just as managers wish to build diversification and risk‑management strategies into the underlying investment portfolio, similar attention needs to be given to one’s investor base as well.”

European investors are generally a “very sophisticated bunch,” offers Harvey, having spent years in the asset‑management arena including hedge funds and fund‑of‑funds, and, given current circumstances, are keen on exploring new opportunities. Almost half of European hedge fund investors reside in the

UK, which, says Harvey, is yet another positive for foreign interests, “since from a regulatory perspective, the UK is by far the most accessible territory within the region.” Although a bit more complex, Switzerland is also an attractive target with a relatively straightforward and inexpensive approval process, says Harvey.

Choosing between UCITS or AIF often depends on a fund’s liquidity characteristics, as well as the type of investor the fund wishes to target. “Without the ability to meet UCITS’s weekly liquidity profile, funds could pay the price should another major dislocation occur,” says Harvey. If feasible companies could consider both structures, as certain countries (Germany, France, Italy and Spain included) have only a limited appetite for funds outside the UCITS format. While performance differences between the two structures have been negligible in the current low‑yield environment, Harvey believes that rising volatility may result in a greater dispersion of performance going forward, with AIF‑type products exhibiting a greater risk/reward profile.

Paul Harvey is the Founder and CEO of Juniper Place LLP, an innovative Investor Intelligence and Placement business that introduces smart technology at each stage of the asset-raising process. Paul has 24 years of experience in the alternative asset management industry, initially in Private Equity and the last 19 years in the Hedge Fund industry.

¡ 4 ¡

“...the supply-demand characteristics of the distribution landscape have shifted dramatically, and the result has been a dearth of high-quality US-located product for EU investors.”

The right routeChoosing between UCITS or AIF often depends on a fund’s liquidity characteristics, as well as the type of investor the fund wishes to target. “Without the ability to meet UCITS’s weekly liquidity profile, funds could pay the price should another major dislocation occur,” said Harvey. If feasible companies could consider both jurisdictions, particularly since certain countries (Germany and Italy included) will only engage with firms that are in the UCITS format. While performance differences between the two structures have been negligible in the current low‑yield environment, Harvey believes that rising volatility and changes to global monetary policy (particularly in the US) may begin favoring AIF‑type products.

John D’Agostino, managing director, head of Americas for global fund governance firm DMS Offshore Investment Services, said there are a number of considerations for investors when selecting the best route to market. “First, there is the length of commitment to a pan‑EU strategy—when funds are entering a ‘friendly’ jurisdiction such as the UK, for instance, using the NPPR registration is simple enough and may suffice at least during the early going,” D’Agostino said.

As additional jurisdictions are targeted, however, it becomes more efficient for managers to fully register the fund, and, where AIFs and UCITS are concerned, perhaps retain the services of a third party AIFM,

“particularly since different member states may have their own interpretation of AIFMD,” said D’Agostino. When looking at a third party AIFM option versus an in‑house solution, funds should weigh the implications of moving substantive risk or investment‑management control to an internal satellite office, as well as establishing and maintaining a direct relationship with

a local regulatory body. Given these factors, a third party AIFM can be enormously beneficial by helping to allocate resources in a more efficient manner, D’Agostino said.

While liquidity is often the key determinant when choosing between UCITS and AIF, funds may also look to their investors for guidance. “If you’re fortunate enough to have a strategy that could work with either structure, your ability to raise capital may ultimately be determined by the makeup of your existing, or potential, investor base,” said D’Agostino.

John D’Agostino is a Managing Director at DMS Offshore Investment Services (DMS) and leads the firm’s North and South American operations. He serves as a board member on funds and directs global business development. He has been featured in two New York Times bestselling business titles and multiple publications.

¡ 5 ¡

“...a third party AIFM can be enormously beneficial by helping to allocate resources in a more efficient manner.”

BNP Paribas’ roleIf an onshore vehicle is preferred by seed investors, or becomes a requirement by core investors in an existing fund, an AIF would be the most logical approach, remarked Ian Lynch, global head of hedge fund services with BNP Paribas. “Whereas if core investors have restrictive mandates, managers may instead opt for a UCITS, assuming the economics stack up and the strategy fits. Since many investors in

continental Europe are no longer able to access some offshore funds, they are often willing to accept the perceived ‘tracking error’ effect of UCITS versus the manager’s flagship offshore fund.”

To support business growth in the years ahead, one requires a reputable partner with both the experience and product

bandwidth who can “manage the heavy lifting” so that clients can in turn focus on the business of managing money, said Lynch. “This includes securing regional fund representation and investor servicing in key distribution markets, having global trading and settlement connectivity, as well as online reporting capability.”

Custody is particularly important under both AIFMD and UCITS, according to Lynch. He explained: “when the goal is to insure all of the assets in the portfolio, the larger the sub‑custody network, the better. At BNP Paribas, for instance, we own the sub‑custody network, which, from a risk perspective, is a key attribute.”

Like it or not, regulation is here to stay, said Lynch, yet with the right partner on board investors stand a better chance of having a successful EU marketing campaign. Under AIFMD, for instance, cash monitoring, oversight and safekeeping have risen to the fore, making it necessary to have a full‑service depositary, said Lynch. “While bigger isn’t always necessarily better, in this kind of situation you really do need a bank with a large balance sheet that can satisfy investor requirements.”

Having a global player with local expertise such as BNP Paribas is also paramount, added Lynch. “In the world of onshore regulated funds, one needs agents on the ground—hence the significance of maintaining that kind of regional representation.” Thus, understanding the myriad regulatory nuances that may distinguish one market from the next remains an essential part of the provider’s skill set. “You need people who not only are familiar with the indigenous regulatory rules, but also have a thorough understanding of the system and how to solve the problems that are unique to a specific region.”

Ian Lynch is the Global Head of Hedge Fund Services at BNP Paribas. Ian joined BNP Paribas through the acquisition of Credit Suisse’s Prime Fund Services business in 2015. Ian was previously a Managing Director of Credit Suisse in the Investment Banking Division and a member of the Equities department with responsibility for the Prime Fund Services (PFS) business globally.

¡ 6 ¡

“You need people who are not only familiar with the indigenous regulatory rules, but also have a thorough understanding of ...how to solve the problems that are unique to a specific region.”

The bankfor a changing

world

The information contained within this document (‘information’) is believed to be reliable but BNP Paribas Securities Services does not warrant its completeness or accuracy. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ judgment and are subject to change without notice. BNP Paribas Securities Services and its subsidiaries shall not be liable for any errors, omissions or opinions contained within this document. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. For the avoidance of doubt, any information contained within this document will not form an agreement between parties. Additional information is available on request.BNP Paribas Securities Services is incorporated in France as a Partnership Limited by Shares and is authorised and supervised by the European Central Bank (ECB), the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers).BNP Paribas Securities Services, London branch is authorised by the ACPR, the AMF and the Prudential Regulation Authority and is subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority and regulation by the Financial Conduct Authority are available from us on request. BNP Paribas Securities Services, London branch is a member of the London Stock Exchange. BNP Paribas Trust Corporation UK Limited (a wholly owned subsidiary of BNP Paribas Securities Services), incorporated in the UK is authorised and regulated by the Financial Conduct Authority.In the U.S., BNP Paribas Securities Services is a business line of BNP Paribas which is incorporated in France with limited liability. Services provided under this business line, including the services described in this document, if offered in the U.S., are offered through BNP Paribas, New York Branch (which is duly authorized and licensed by the State of New York Department of Financial Services); if a securities product, through BNP Paribas Securities Corp. or BNP Paribas Prime Brokerage, Inc., each of which is a broker‑dealer registered with the Securities and Exchange Commission and a member of SIPC and the Financial Industry Regulatory Authority; or if a futures product through BNP Paribas Securities Corp., a Futures Commission Merchant registered with the Commodities Futures Trading Commission and a member of the National Futures Association.© 2016 Dechert LLP. All rights reserved. This publication should not be considered as legal opinions on specific facts or as a substitute for legal counsel. It is provided by Dechert LLP as a general informational service and may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome. We can be reached at the following postal addresses: in the US: 1095 Avenue of the Americas, New York, NY 10036‑6797 (+1 212 698 3500); in Hong Kong: 27/F Henley Building, 5 Queen’s Road Central, Hong Kong (+852 3518 4700); and in the UK: 160 Queen Victoria Street, London EC4V 4QQ (+44 20 7184 7000). Dechert internationally is a combination of separate limited liability partnerships and other entities registered in different jurisdictions. Dechert has more than 900 qualified lawyers and 700 staff members in its offices in Belgium, China, France, Germany, Georgia, Hong Kong, Ireland, Kazakhstan, Luxembourg, Russia, Singapore, the United Arab Emirates, the UK and the US. Further details of these partnerships and entities can be found at dechert.com on our Legal Notices page.Printed on recycled paper with vegetable inks – Designed by the graphics department, corporate communications, BNP Paribas Securities Services160412_MFIE_BR_US

Follow us: Visit us:

securities.bnpparibas.com