Such “sleeves” are usually passported into the EU under the Alternative Investment Fund Managers Directive (AIFMD). Passporting means that the Luxembourg sleeve makes a single marketing filing with the Luxembourg regulator, which permits the marketing of the product to EU professional investors throughout the EU without the need to obtain separate marketing approvals in individual EU Member States.

As aforementioned, the passport permits marketing to EU professional investors only. The bar to qualify as an EU professional investor is - from a US point of view - high. It mainly includes institutions, large corporates and HNWI who meet a number of requirements that are perceived as hard to meet. USFM should assume that most EU-based HNWI do not qualify, making the AIFMD passport an inefficient route to access EU HNWI capital. 

The AIFMD allows each EU country to set its own standards for marketing to HNWI. USFM that wish to raise capital from EU HNWI must thus do a cumbersome multi-country analysis of the local marketing requirements. The fragmented EU regulatory landscape makes it highly challenging to distribute unregulated private funds to EU-based HNWI.

HNWI capital is highly sought after by the industry. USFM can boost their AuM by offering HNWI access to the attractive yields of private assets. The available pools of HNWI capital are substantial and can offer valuable liquidity to private markets. Luxembourg offers effective solutions to tap into this investor base.

The so-called Part 2 UCI, a regulated and supervised Luxembourg fund product, meets the HNWI local marketing requirements in many EU and non-EU countries. However, it does not benefit from a marketing passport for EU-wide access to HNWI. A Part 2 UCI broadly resembles the structure and features of a US interval or tender fund. It can accommodate a wide range of investment strategies focused on both EU and non-EU markets. Traditionally, the Part 2 UCI has served as the EU gateway for the retailization of private markets.

Since Jan 10, 2024, private funds, such as the Part 2 UCI, may apply for the European Long Term Investment Fund (ELTIF) label, which includes an EU retail marketing passport. ELTIFs must meet rules on eligible assets, diversification and borrowing. A Part 2 UCI with ELTIF label can target HNWI both within and outside the EU.

The next Snippets in this Series, will provide insights into the Part 2 UCI and ELTIF regimes, all tailored to the needs of USFM.

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