The European Commission announced a proposal for a supplementary AIFM Directive on 12 March 2018. A key area of focus for this proposal is around so-called "pre-marketing" of private equity and other alternative investment funds in Europe to potential fund investors.
Currently, AIFMD regulates "marketing" to such investors, and not "pre-marketing". As a result, an advisory industry has sprung up regarding where the boundary between "pre-marketing" and "marketing" lies. However, this is not just an esoteric legal point, it really matters.
It matters for fund managers because some countries have imposed additional rules (i.e. barriers) in relation to "marketing" and, put simply, managers don’t want to have to spend time and money meeting the relevant requirements unless they have a reasonably good prospect of securing a commitment from an investor located in the relevant country. However, the 'catch' is of course that the only way they can assess how good their chances are is by testing the market beforehand - so the ability to “pre-market” is essential to avoid significant wasted time and expense.
It also matters for investors because many managers simply won’t take the risk of wasting lots of time and money, and so they will simply cut certain jurisdictions out of their fundraising plans if they are unable to pre-market in a sensible way. As a result, we have seen investors in some of the more conservative jurisdictions being cut off from access to certain products.
When AIFMD first came in, there was little guidance about pre-marketing in most jurisdictions and a cautious approach was taken. This position has evolved and softened (a little) over time in some key countries - Germany and France being good examples - and most managers can now engage in some form of market testing without triggering the sometimes onerous registration requirements in multiple European countries.
The fact that pre-marketing as a concept is understood/interpreted differently in different jurisdictions is of course a real headache for managers. So, in theory a uniform definition across Europe – which is what the European Commission is proposing - should be welcomed (even though it means less work for lawyers like us).
However, the risk is that the definition now proposed by the EU is based on the approach that has evolved in member states such as Germany, which is more restrictive and less pragmatic than what is currently permitted in countries such as the UK. Also, managers are currently able to take a business decision based on facts and circumstances (overlaid with some legal advice), but once there is a definition written in law it will be harder to “take a pragmatic view” as in future it is likely to be much more black and white (and not necessarily in a helpful way).
The EU is proposing to define pre-marketing as "a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established". Although that sounds promising, the proposal then goes on to say that activity won't qualify as pre-marketing where the information (i) relates to or contains reference to an established AIF; (ii) enables investors to commit to a particular AIF; or (iii) amounts to a prospectus, constitutional documents of a not-yet-established AIF, offering documents, subscription forms or similar documents whether in a draft or a final form allowing investors to take an investment decision.
In the UK - for so long as the AIFMD continues to apply - this would be a backward step, as it's currently possible to provide draft fund documents without being regarded as marketing for AIFMD purposes. We will be assessing the impact elsewhere with our colleagues in Hogan Lovells' European funds team.
