As Australian-based private fund managers look to scale their operations having tapped their network of family offices and high net wealth individuals, many are looking to Asia and Europe as a source of capital. European investors, in turn, are interested in the typically higher returns available in the Australian market, particularly in the private debt market.

Obtaining an AIFMD passport

While setting up feeder structures for the European investors and using the relevant national private placement regimes to market an Australian fund in each European jurisdiction remains a viable option for the time being (particularly where marketing activities are limited to a handful of EU jurisdictions) [1], Australian fund managers considering targeting EU investors may wish to consider establishing a parallel fund vehicle in Europe compliant with the Alternative Fund Managers Directive (AIFMD) passport to market to professional investors in all the member states of the European Economic Area (EEA).

While there are costs associated with establishing an AIFMD-compliant parallel fund vehicle, the associated costs are usually outweighed by the significant market reach enjoyed by AIFMD compliant fund vehicles. An added benefit of using a European fund vehicle is international investors’ increased familiarity with the form of such structures (e.g. limited partnerships or corporates) compared with Australian unit trusts, which can lead to more straightforward investor negotiation processes.

It is understood that the AIFMD passport might be made available directly to Australian fund managers in the future based on guidance issued by the European Securities and Markets Authority previously; however, the spectre of Brexit appears to have put further discussion regarding the extension of the AIFMD passport to countries such as Australia largely on hold.

Finding an Alternative Investment Manager

An initial step in establishing an AIFMD-compliant European fund vehicle is to select a compliant Alternative Investment Manager (AIFM). While it is possible for Australian fund managers to establish their own EU AIFM entity in Europe, the regulatory burden (depending on size and use of leverage) is usually not considered worth it on balance. The most common approach for non-EU fund managers is to work with an EU AIFM service provider, who effectively authorises the non-EU fund manager to work as its representative, retaining only minimal oversight duties.

It is also advisable to select an EU Markets in Financial Instruments Directive II-compliant distributor. The distributor can then authorise the relevant investor relations personnel of the Australian fund manager (usually AFSL-authorised) Australian fund manager to market directly within the relevant EEA jurisdictions. Other local service providers that it would be advisable to appoint are a fund administrator, a domiciliation agent, a depositary, a Money Laundering Reporting Officer (MLRO), and an external auditor.

The above is only relevant for marketing in the EEA (i.e. Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, the UK, Gibraltar, Iceland, Liechtenstein and Norway). An interesting European investor jurisdiction that falls outside of the EEA is Switzerland. However, scaling an AIFMD-compliant fund to market in Switzerland is rather straightforward, mainly requiring the appointment of a Swiss Representative and a Swiss Paying Agent.

How we can help

Our Funds team has lawyers with relevant funds establishment experience in Europe and works closely with relevant advisers in Europe to establish AIFMD-compliance funds and guide you through the regulatory regime (which covers the pre-marketing of funds that are at an early stage of their genesis). We also have contacts and extensive experience in dealing with within EEA jurisdictions having worked with Australian fund managers to ensure compliance with the General Data Protection Regulation (GDPR) which has extra-territorial application, complemented by local advisers in the relevant jurisdictions.

For further information, do not hesitate to contact us

[1] National private placement regimes are intended to be largely phased out in the future in favour of the exclusive use of the AIFMD passport.