Although the fundraising climate in 2023 is more challenging than in prior years, US fund sponsors still look to tap into the European professional investor market. However, US fund sponsors are reluctant to incur material costs to prepare for a European capital raise when there is an elevated risk that a fundraising effort in Europe may not be successful. Hence, testing investor appetite is key.
Prior to August 2021, the rules around efforts to test investor interest (generally referred to as “pre-marketing”) were not harmonized in the EU, resulting in varying interpretations of what was permissible without a marketing registration. Since August 2021 there is a harmonized definition of pre-marketing in the EU. What the definition generally boils down to is that pre-marketing is the effort of testing EU investor interest for an investment idea or strategy whereby prospective EU investors cannot be presented with “sign on the dotted line” style documents or other key fund documents which are in final or near-to-final form.
In addition to a harmonized definition of pre-marketing, the EU pre-marketing passport saw the light in August 2021. Such a passport can be obtained by an authorized EU AIFM and is only subject to a simple notification with the EU regulator of the country where the AIFM is located. The pre-marketing passport secures EU-wide pre-marketing access to professional investors without the need to first launch the fund, incur administrative fees, engage in burdensome registration procedures or already select the type of vehicle that prospective EU investors would commit to.
Luxembourg ‘host AIFMs’ typically offer pre-marketing as a separate service under a so-called chaperone agreement, whereby the Luxembourg host AIFM and the US sponsor team up when approaching prospective EU investors. The pre-marketing service can be subcontracted to certain EU-regulated entities, which in practice are often placement agents.
If a US fund sponsor does not want to use a Luxembourg host AIFM, the route to pre-marketing is not closed but the route to the pre-marketing passport is. The US asset manager can then navigate the pre-marketing regime of the relevant EU countries on an individual basis. Practice shows, however, that the bar to secure a pre-marketing passport is perceived as low and that most US fund sponsors do not bother exploring the pre-marketing rules of individual EU countries and go directly for the pre-marketing passport.
One thing to keep in mind is that passported pre-marketing in a particular EU country closes the door for 18 months to onboard investors from such EU country via reverse solicitation in respect of the pre-marketing strategy concerned. For example, if passported pre-marketing efforts in EU country A are conducted in respect of investment strategy B (e.g. private equity), investors in country A cannot be onboarded via reverse solicitation in respect of strategy B for the next 18 months. Instead, such investors can only be onboarded for that strategy after the marketing registration in country A is done. This rule applies to all investors in country A even if the investors were not approached in the context of passported pre-marketing for strategy B. The rule applies on a per-investment-strategy basis. Thus, investment strategy C (e.g. private credit) is still eligible for reverse solicitation in country A provided it was not pre-marketed.
In summary, the pre-marketing passport is generally perceived as a (cost) efficient way to approach potential investors on an EU-wide basis. During challenging fundraising times, the pre-marketing passport does the trick!