Breaking into Europe: How ManCos are helping US managers with distribution

Jon Masters (INDOS Financial, a JTC Group Company) discusses how as US asset managers increasingly look to market and distribute their funds into the European Union (EU), many are now turning to Management Companies (ManCos) for support.

Targeting Europe: US managers look outside of the domestic market

Historically, many US fund managers chose not to distribute their products into the EU, as they felt the market was too complex and fragmented, especially following Brexit.

Given the sheer amount of investable assets in the domestic market too, there was also not much need for US managers to go on sales trips beyond their own borders.

Attitudes in the US, however, are slowly starting to soften towards the idea of distributing into the EU.

This is partly because US managers want to diversify their client base outside of North America, but equally firms now recognise they can no longer ignore what has become an increasingly sizeable EU investor market.

An investor market on the ascent

Institutional assets in the EU are enjoying healthy growth and have done for some time now.

The institutional investor market in Germany for instance, has expanded by 8.4% annually since 2013, and now sits on a cash pile totalling €3.4 trillion1.

Elsewhere, pension fund reforms in the EU are also in full swing with several of the leading economies, namely France, Germany, and Italy, moving away from defined benefit (DB) schemes to defined contributions (DC)2, a development that has not gone unnoticed at capital hungry asset managers.

Similarly, Europe’s retail investors, who historically have been more comfortable sitting on cash deposits, are also ramping up their allocations to funds.

According to the European Fund and Asset Management Association (EFAMA), retail clients accounted for 30% of the €27.8 trillion in assets controlled by European fund managers in 2022, an increase from 26% in 20203.

However, targeting EU investors is not always a straightforward process for US-based managers.

Distributing in the EU: Pre-Marketing catches people out

Marketing and distributing funds in the EU can be a notoriously complex process for US managers.

Even a non-EU manager testing the waters to see if there is any potential interest in a specific product or strategy could find themselves being caught out by the EU’s Pre-Marketing Rules.

Designed initially to prevent different EU member states from adopting their own customised pre-marketing rules, the regulation requires non-EU managers to notify member state(s) if they are engaging in any pre-marketing activities within that particular jurisdiction.

For some, these provisions create further complexity and are yet another barrier to entry facing non-EU managers when trying to access the EU.

Getting distribution right

There are three ways in which non-EU managers can market to EU investors.

NPPR

The first is to use the Alternative Investment Fund Managers Directive’s (AIFMD) National Private Placement Regime (NPPR), which lets non-EU managers register their fund(s) in a EU member state(s) for marketing purposes.

Although NPPR is subject to heavy restrictions in certain EU countries (e.g. France), this approach is a sensible one for managers to take, providing they are only targeting investors located in a select few member states, versus all 27.

Reverse Solicitation

If NPPR is not palatable, then some non-EU managers may choose to use what is known as reverse solicitation, although this is technically not marketing.

In fact, reverse solicitation is quite the opposite of active marketing, as it involves managers relying on EU investors reaching out to them independently about their funds. The reverse solicitation model will typically only work for brand name managers or those with pre-existing client relationships in the EU.

However, reverse solicitation is a very risky strategy for managers to take – certainly from a compliance standpoint. This comes following criticism about reverse solicitation from several EU member state regulators, who have said publicly that the practice is open to abuse.

Full AIFM

Another option would be for a non-EU manager to launch an AIFM themselves, which would allow them to leverage the AIFMD marketing passport and distribute their products seamlessly on a pan-EU basis.

Despite the distribution benefits this structure offers, setting up an AIFM is an expensive undertaking, as it requires non-EU managers to establish physical operations inside the EU.

At a time when margins are shrinking, most managers would argue that this approach is simply not economical.

ManCos: Go Your Own Way

Increasingly, US and other non-EU managers are appointing Ireland-based ManCos, as they look to access EU-based investors, without the hassle of setting up onshore operations.

A ManCo, through its AIFMD licence, lets non-EU managers distribute their funds cross-border without having to invest in the physical infrastructure that comes with running an AIFM.

This is a cost-effective way for US managers to grow their EU client base.

Appointing a ManCo can also benefit managers by providing a pre-marketing service. Pre-marketing is a regulated activity in Europe that offers managers wishing to perform cross-border distribution or to launch a European investment fund the opportunity to test investors’ appetite for their strategies at a limited cost through an AIFM.

The ManCo also gives fund managers access to high-quality resources — people with hands-on portfolio management experience, risk management professionals and governance professionals.

Not only is Ireland a well-regulated jurisdiction, but it also shares a similar culture and common language with the US, which gives the country an edge over, say, Luxembourg.

As more US managers gravitate towards the EU, Ireland is likely to be one of the main beneficiaries, as well as the asset managers themselves.

References

1Universal Investment. Published December 13, 2023. What is the scale and opportunity of the German market?

2Pensions & Investments: Published August 18, 2023. Commentary: Rethinking Europe – the multitrillion dollar opportunity US asset managers are overlooking

3EFAMA. Published December 14, 2023. Asset managers on course to manage EUR 29 trillion in 2023