Opening doors to pre-marketing of alternative investment funds

September 2021 | SPECIAL REPORT: PRIVATE EQUITY

Financier Worldwide Magazine

September 2021 Issue

We are on the verge of the entry into force of a new regulatory package – made up of European Union (EU) Regulation 2019/1156 and EU Directive 2019/1160 – that seeks to eliminate those obstacles that, over the years, have appeared in the context of cross-border marketing of most private equity vehicles set up as alternative investment funds, currently governed by EU Directive 2011/61 EU (also known as the Alternative Investment Fund Managers Directive (AIFMD)). These rules try to enhance transparency and investor protection, paving the way toward a true single market by removing many of the existing administrative barriers and procedures.

In this article we focus on one of the newest issues: marketing activities that a fund manager can carry out prior to setting up a vehicle or commencing formal commercialisation. This is done by means of a relevant passport or authorisation, which is currently a matter of interpretation for each member state of the EU.

As a result, today there is no uniform position at EU level, which results in serious differences between its treatment among member states, with some taking a flexible and open approach, while others, such as Spain, adopting a restrictive approach that de facto prohibits pre-marketing.

What is pre-marketing?

The question of what constitutes pre-marketing – i.e., the promotional activities a fund manager can undertake with respect to a fund that falls short of ‘marketing’ under the AIFMD – is currently a matter of interpretation for each EU member state.

This disparity created a real barrier for many asset managers. When planning commercial policies and strategy, they had to take into account 27 different regulators with totally different approaches to and views on pre-marketing and testing appetite in the market for a vehicle yet to be set up or even for a particular investment strategy.

The new rules, which in principle should come into force in August 2022, try to put an end to these divergent interpretations by imposing a new, standardised definition of pre-marketing and regulating, at a pan-European level, specifically what management companies can (and cannot) do as part of their activities.

In this regard, the AIFMD defines pre-marketing as: “the provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors domiciled or with a registered office in the Union in order to test their interest in an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing in accordance with Article 31 or 32, in that Member State where the potential investors are domiciled or have their registered office, and which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment”.

Conditions for pre-marketing in the EU under the new regime and potential advantages

The pre-marketing regime is of great importance, especially in the case of alternative investments, since it allows firms to gauge the appetite of the institutional market for strategies or a specific vehicle before launching or obtaining a passport. The new legal text establishes a series of common conditions for pre-marketing that refer to the information provided to potential investors, which should not allow investors to commit to acquire units or shares in a particular vehicle, nor constitute subscription forms or similar documents, a prospectus or offer document relating to an alternative investment fund (AIF) that has not yet been established in its final version.

Furthermore, regulations require that when a draft prospectus or offer document is provided, they should not contain sufficient information to allow investors to make an investment decision, and should clearly indicate that they do not constitute an offer or invitation to subscribe participations or shares. It should be clear that the information is unreliable because it is incomplete and may be subject to change.

A manager must inform the regulator of origin two weeks before the start of pre-marketing activity, about its intention, indicating the member states and the periods during which the activity will be carried out, as well as providing a brief description of the activities, strategies and vehicles involved. The regulator of the home member state will inform other member states in which the pre-marketing activities will take place, thus simplifying the administrative burden and removing the need to notify each of the regulators involved.

Despite this flexibility, management companies will not be able to take advantage of the reverse solicitation exception for an 18-month period following the start of pre-marketing. This has been one of the most widely discussed rules and criticised by the industry, since the pre-marketing application may result in a need to passport the AIF for its subsequent marketing, even though investment appetite may not be high in certain jurisdictions, in order to accommodate the entry of potential investors, albeit a limited number.

It should be noted that reverse solicitation cannot be considered as a marketing strategy or a way to circumvent AIFMD requirements. Most regulators are heavily scrutinising reverse solicitation so it may be necessary to clearly demonstrate the nature of any reverse solicitation with correspondence and telephone records. But, even with a complete communication trail, the fund manager can be at risk where there is a high number of reverse solicitation requests.

Another issue in the new regime is the fact that managers must ensure that their pre-marketing activities are “duly documented”. Presumably, this will mean keeping a record of investors contacted during the pre-marketing phase, the materials provided to them and, potentially, a record of issues discussed (either in person or over the phone), so that evidence can be presented.

For many management companies, especially smaller ones, this may create an administrative burden. Even so, we believe this is outweighed by the advantage of being able to gauge interest in a strategy or product. In this way, fund managers can avoid the relatively common situation of failing to generate interest from investors in some jurisdictions, with all the expense that entails.

Despite inconveniences, we believe that this novelty in the PE environment, particularly in the Spanish market (since it is already allowed in other legal systems), will be well received. Despite the fact that it will require prior notification and certain administrative formalities, it should allow fund managers to plan better.

On the other hand, it may also increase the product range offered to potential investors, without them having to wait for vehicle launch or passport procedures.

Josefina García Pedroviejo is counsel at Ashurst. She can be contacted on +34 91 364 9443 or by email: josefina.garciapedroviejo@ashurst.com.

Josefina García Pedroviejo

Ashurst