We currently see increased appetite of EU investors for investment in the United States. US fund sponsors want to make use of this momentum and raise capital in Europe. In this Snippet we highlight a few red flags relevant for unregulated US fund sponsors that want to do fund marketing in the EU.

To secure a successful capital raise in Europe, US fund sponsors should anticipate that prospective EU investors strongly prefer an EU limited partnership as the vehicle to commit their capital to. Such vehicle will typically be a Luxembourg special limited partnership (SCSp) that feeds into, or invests in parallel with, a Delaware limited partnership that is the main fund.

In case of a first-time EU capital raise, US sponsors usually prefer to conduct the risk and portfolio management of the Luxembourg SCSp directly out of the US. In that case, the SCSp can only be marketed under the national private placement rules (NPPR) of the relevant EU Member States. Most northern EU Member States have efficient NPPR regimes and obtaining marketing access to those States often suffices for US sponsors. The alternative is to engage an authorized EU (host) AIFM to secure an EU marketing passport, which allows an EU-wide offering.

US sponsors that are not subject to regulatory supervision by e.g. the SEC (typically real estate fund sponsors) should be aware of two red flags. First, the NPPR strategy may need to be ruled out as NPPR permissions are unlikely to be granted if the US sponsor is not subject to regulatory supervision. Second, if the above-mentioned alternative is used (i.e., engagement of an EU (host) AIFM), the US sponsor typically takes an advisory role vis-à-vis such EU (host) AIFM. That’s because delegation of the portfolio management function by the EU (host) AIFM to the US sponsor in principle requires the US sponsor to be subject to supervision.

Delegation to a non-supervised US sponsor is subject to prior approval by the EU (host) AIFM’s regulator, which is only granted after a thorough screening process that can take months. Unregulated US sponsors should factor in these red flags when their EU fundraising plans are on the drawing board.

Want to know how to navigate these red flags when raising capital in Europe? Reach out to our experts from our NYC team.