US sponsors of private funds, which are geared towards professional investors, show an increased interest in the EU retail investor market. Those sponsors consider launching fund entities targeting retail investors which invest, in turn, in their existing private funds. What are the key rules for marketing such funds to EU retail investors

EU marketing rules for private funds distinguish between retail and professional investors. The latter are institutional investors, large companies, and investors that opt-in as professionals (strict opt-in conditions apply). All other investors are retail investors. 

A private fund can obtain marketing access to EU professional investors under an EU marketing passport or under the EU country-specific marketing rules. Most EU countries have (relatively) efficient marketing rules for professional investors, but Italy, France, and Austria are key exceptions. Marketing access to EU retail investors is governed by the specific rules applicable in the relevant EU country, subject to certain exceptions. Those are a classic EU patchwork.

In certain EU countries, access to retail investors is available if a minimum investment amount (typically at least EUR 100k), minimum wealth test and/or experience test is met. I.e., tests that aim to identify “high-end” retail investors. 

The marketing regime for retail investors in certain EU countries is only accessible, or is relaxed, if the fund has an EU marketing passport to access professional investors.  Finally, access to EU retail investors in some EU countries may be eased if both the manager and the fund are subject to regulatory approval and oversight.

A Luxembourg fund set up under the “Part 2 UCI regime” is subject to regulatory approval and oversight in Luxembourg. Adopting the Part 2 UCI regime is subject to a complex and potentially lengthy approval process and comes with e.g., diversification conditions. Under the Part 2 UCI regime a Luxembourg fund can have different compartments.

Although the Part 2 UCI regime may accommodate better access to retail investors on a country-by-country basis, it does not come with an EU retail marketing passport. The modernized European Long Term Investment Fund (ELTIF) regime, which will take effect on 10 January 2024, does come with such a passport. That regime remains subject to an investor suitability test, but no minimum ticket requirement applies. The ELTIF regime also comes with diversification, concentration, leverage, and investment restrictions.

If a US private fund sponsor intends to “go all in” on the EU retail investor market with a private fund strategy, a Luxembourg feeder fund set up under the Part 2 UCI regime or the ELTIF regime or an ELTIF compartment within a Part II UCI is worth exploring. The latter set-up is currently used by several Anglo-Saxon managers.

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