AIFMD set to sideline Asian funds

A significant number of Asian alternative fund houses are likely to cease all attempts to raise money in EU countries as a result of imminent European regulation.

Under the Alternative Investment Fund Managers Directive (AIFMD) – slated to come into effect on July 22 – hedge funds, private equity funds and other alternative managers looking to raise funds in the EU will be more closely regulated under the European Securities and Markets Authority directive.

Heightened oversight will undoubtedly lead to increased compliance costs for Asian fund houses, says Alex Last, Hong Kong-based partner at offshore law firm Mourant Ozannes.

Larger Asian funds, many of which have a significant number of Europe-based investors, are likely to comply with the new AIFMD rules by running two parallel fund structures – one AIFMD-compliant and another Cayman Islands-domiciled.

But smaller firms may simply avoid the European market altogether to avoid the additional costs, and instead focus their fundraising efforts elsewhere, such as North America.

This prediction fits in with the recent annual industry survey by AsianInvestor and Clifford Chance*, which finds that only 4% of Asian fund managers are considering Europe as an important destination to raise assets in the next 12 months, while 27% cited North America.

Furthermore, some 20% of respondents say they are planning on either moving out of Europe or will stop marketing their funds to EU investors.

However, 37% of respondents plan to restructure their funds to be Ucits-compliant, and 5% will move onshore to Europe.

For funds still looking to tap into the European investor base, AIFMD has made certain allowances for private placements until 2018, permitting large European countries – such as Germany, France, the UK and Italy – to implement their own private-placement guidelines.

However, Stéphane Karolczuk, Hong Kong-based partner at Luxembourg law firm Arendt & Medernach, expects different countries to consolidate their private-placement rules over time to comply with AIFMD. As such, Asian fund houses will not benefit from any “safe harbours” for long. “In those cases, managers will have no other choice [but to] become AIFMD-compliant,” says Karolczuk.

It is still possible for Asian fund houses to avoid regulation and gain access to European markets via reverse solicitation. Hence a Hong Kong-based manager running a Cayman fund could accept European investors that approach it on their own initiative.

Karolczuk says he’s already received requests from Asian fund managers seeking more information on reverse solicitation.

“What is important is [that funds] avoid cold calling and investor solicitation,” he says. “If you take an investor who is frequently travelling to Hong Kong, once a month for example, and if that [a European investor] has contact with an asset manager in Hong Kong and wants to invest in his fund, he or she is obviously free to do so, and that manager should be free also.”

He notes that once such contact between both parties is made, Asian fund houses can send relevant documentation to the investor.

Reverse solicitation is helpful for smaller managers, particularly in the private equity space, where investors may be interested in putting more money in future funds. But it isn’t a great way to raise substantial assets, one lawyer notes.

“I don’t think you can rely on reverse solicitation for raising lots of money,” the lawyer says. “By its nature, you already know the investors. So if you are looking to reach a new target audience, this may not be the most effective.”