Europe has long held significant appeal as a fund centre, attracting capital raising opportunities for alternative investment managers. Demand for transparency and regulatory reporting has also been on the rise, given that investors have become more sophisticated and European regulatory bodies place more emphasis on investor protection. Indeed, a European vehicle allows for greater protection and liquidity to investors, greater uniformity and transparency and less regulatory uncertainties.
In today’s environment, Europe continues to offer alternative investment managers attractive fundraising opportunities. The receptiveness of open-minded legislators has allowed major jurisdictions to come up with innovative structures to cater for alternative strategies. The choice of the jurisdiction will determine the country-specific operational and legal requirements and which fund structure options are accessible.
The most prominent fund jurisdictions are Luxembourg, Ireland and Malta and all three jurisdictions have alternative investment fund structures which support essential characteristics: 1) speed to market; 2) accessibility; and 3) flexibility. The Reserved Alternative Investment Fund (RAIF), Qualifying Investor Alternative Investment Fund (QIAIF) and the Notified Alternative Investment Fund (NAIF) in Luxembourg, Ireland and Malta respectively have been a game-changer to the structuring and launch of alternative strategies.
The most prominent fund jurisdictions are Luxembourg, Ireland and Malta
These AIF structures encompass investment strategies that fall outside of the conventional strategies such as long-only strategies. Instead, AIFs may pursue alternative strategies involving leverage, derivatives, cryptocurrencies and hold illiquid assets like immovable property, infrastructure, private equity and distressed debt. Other niche strategies involving vintage cars, works of art and wine may also be set up under the AIFMD directive.
Malta has applied the NAIF regime. The local financial services regulator (MFSA) has committed itself to list the NAIF on the notified list within 10 business days from the submission of a complete notification pack. NAIF’s characteristic is that the AIFM assumes full responsibility for the fund and for the fulfilment of its obligations. This entails that the ‘fit and proper’ exercise and ongoing supervision on the relevant service providers and governance of the structure are the AIFM’s responsibility.
Such records are to be kept on file by the AIFM and update the MFSA accordingly in case of any changes. The NAIF may be subscribed by professional and/or qualifying investors. In addition, the NAIF is not bound by any investment diversification rules and may invest in a single underlying asset. Since the AIFM is authorised to market through the AIFMD marketing passport, it will allow the AIFM to market its NAIF to other EU jurisdictions.
In all three regimes, since there are no reviews or authorisation approvals by the respective national authorities, the timeframe to launch is within the control of the relevant parties based on how efficient the drafting and negotiation of the legal documentation is. All three jurisdictions offer great potential to launch alternative strategies like private equity, real estate and infrastructure. While Luxembourg and Ireland share most of the market share in the alternative space, Malta is favoured by start-up managers who wish to penetrate this market and by prominent family offices who are not too concerned on capital raising.
In an evolving and increasingly complex market environment, investors are actively seeking out opportunities to diversify their sources of return away from traditional equity and fixed income investments. Alternative investment strategies can be vital building blocks for a well-constructed portfolio and key elements in facilitating investors to achieve their goals.
Setting foot into the European market can allow overseas fund managers the opportunity to grow their reach and diversify across their client base. Structuring and operating a European fund is not as complex as it may seem. If managers or fund promoters partner with experienced service providers, they can leverage on their expertise, experience and financial strength to penetrate this lucrative market easily and effectively.
Daniel Attard, Senior consultant, Seed Consultancy