US fund manager fundraising in Europe: disclosure regime applicable to preferential treatment – New York office Snippet

The applicable EU regulatory framework governing preferential treatment depends on the USFM’s distribution strategy. The SCSp may be marketed across the EU through the AIFMD passport, provided it is managed by an EU-authorized alternative investment fund manager (EU AIFM). Alternatively, and if no EU AIFM has been appointed, a USFM may opt to market the fund directly in relevant EU countries that allow so under their National Private Placement Regimes (NPPRs). 

Both distribution models permit preferential treatment, meaning that certain investors may receive more favorable terms than others. A description of any preferential treatment must then be provided by EU AIFM and USFMs to (prospective) investors. This description must cover, among others, how managers ensure fair treatment of investors, the types of investors who may receive such treatment and their relationship with the manager and the SCSp. This is typically addressed in the private placement memorandum outlining the categories of preferential terms that may be granted and referring to the limited partnership agreement (LPA) governing the SCSp.

Preferential treatment is granted through side letters. The LPA is then not complexified with investor-specific provisions (e.g., different management fee rates, information rights) and investor-specific terms remain confidential: all investors have visibility over the LPA, but not over other investors’ side letters.

There is no legal requirement to disclose the exact terms of the side letter to other investors and/or providing them with the possibility to opt-in for such favorable terms.

That said, market practice in Europe - for closed-ended funds - is still to conduct an automatic most-favorite-nation (MFN) process after final closing: side letter terms are shared anonymously sometimes with all but typically only with eligible investors, who can opt-in and receive the same terms. The eligibility of investors to opt in to certain terms usually depends on the size of their investment, when they invested or their regulatory status. Alternatively, an MFN process on request is also generally accepted. 

USFM should be aware that the side letter mechanics they are familiar with may need to be calibrated to align with European investor preferences when initiating fundraising efforts in Europe.

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