Beyond the Pros. Marketing AIFs to retail investors in Europe 

AIFMD addresses the distribution of AIFs predominantly to professional investors, with an approach that reflected the needs of the market for alternative investments when the directive was firstly introduced in 2011. Characterised by less or no liquidity and a longer-term horizon, compared to traditional retail friendly opportunities, alternative investments were reserved exclusively to an audience of sophisticated investors.  

Fast forward a decade or so and this picture has radically changed. Over the course of the recent past we heard increasingly more about the so-called democratisation of private markets. Recently new jargon, like evergreen funds, started to gain momentum.  

And whilst AIFMD always catered for the sporadic instances – at least at that time – of marketing AIFs to retail investors, the acquired taste of the masses for alternative strategies puts now under the spotlight the dynamics governing the activity of marketing AIFs to retail investors in Europe.   

Member State Discretion when Marketing AIFs to retail investors 

Testament to the fact that at inception of AIFMD alternative investments were conceived exclusively with the professional investors in mind, AIFMD dedicates one only chapter to marketing AIFs to retail investors, made of one article only. Leaving the bulk of the authorisation process for marketing AIFs to retail investors to the national authorities and legislation of the European Member States, where this is a possibility. As we will see further on, the Cross Border Distribution of Investment Funds Directive added to that chapter with the inclusion of another article containing provisions on the facilities for retail investors.  

Under Chapter 8 AIFMD, Article 43 gives Member States discretion to allow marketing AIFs to retail investors within their jurisdiction. The provision is drafted to encompass both European and non-European AIFs whether marketing domestically or on a cross-border basis and comes coupled with a non-discriminatory clause. Member States shall not impose on EU AIFs established in another Member State and marketed cross-border any stricter or additional requirements, compared to those imposed on local AIFs marketed domestically.  

As reported by ESMA in 2021, 25 Member States currently allowed marketing AIFs to retail investors within their jurisdictions, subject to compliance with national requirements, in addition to those imposed under AIFMD. Amongst these, only one Member State reported that, provided it was carried out in accordance with the national private placement rules, marketing AIFs to retail investors in their territory was not subject to any national requirement in addition to compliance with AIFMD.  

According to the same report, some Member States impose minimum investment thresholds as a condition for retail investors to be able to access AIFs marketed in their territories. Lastly, the local regime in certain Member States caters for quasi-professional investor type categories, which share traits of the professional and retail investor category, to whom AIFs can also be marketed to. These remain local investor categories, not yet reflected in European regulation, where there is still a more clear-cut traditional dichotomy between professional and retail investors.  

EU Harmonised Requirements for Marketing AIFs to Retail Investors 

As part of recent regulatory updates to enhance cross-border distribution of investment funds in Europe, the Cross Border Distribution of Investment Funds Directive introduced Article 43a AIFMD. The provisions under this article impose a harmonised set of obligations for the provision of facilities to retail investors. The facilities serve as a support tool for retail investor interaction within the broader context of marketing AIFs to retail investors. 

When marketing AIFs to retail investors across Europe, AIFMs must ensure that certain investor-facing functions are available in each Member State where the AIFs are marketed. The so-called facilities include a series of tasks, like i) processing investor transactions; ii) providing dealing instructions for investors to be informed about the procedures for making subscriptions and redemptions; iii) facilitating the exercise of investor rights in the AIF; iv) providing access to fund disclosures and documentation. 

Article 43a AIFMD states that, for the purpose of providing the facilities, Member States can no longer require an AIFM to both have a physical presence in any jurisdiction where their AIFs are marketed and to necessarily appoint a third party within the jurisdiction of the host Member State for that purpose. The new regime allows AIFMs also to provide the facilities themselves, should they so desire, or in concert with one or more external third party.  

In a move toward cost-efficiency, facilities under the new regime can be offered also electronically, enabling technology-driven service delivery. This shift is particularly significant for AIFs marketed to retail investors on a pan-European basis, allowing for significant savings compared to the old model where a local third party, likely a credit institution, was to be appointed to offer the facilities. This shift reflects also in part the evolution in the distribution models across Europe, where more direct interaction exists between investors and distributors, most often carried out in a digital fashion.  

Conclusion 

Marketing AIFs to retail investors in Europe remain mostly a local affair. Whilst most of the Member States across Europe allow both EU and non-EU funds to be marketed to retail investors within their territories, the marketing authorisation process is carried out vis-à-vis local authorities, in their local language and subject to a variable degree of gold plating, depending on the jurisdiction at issue and the protectiveness of its internal market.  

Against this backdrop, one consideration remains of paramount importance. Marketing AIFs to retail investors in Europe can take place only when the AIF itself is structured and authorised to receive investments from retail investors in its home Member State. 

About Veneziano and Partners

Veneziano and Partners is an international consulting boutique specialised in the European regulation of cross-border fund distribution. In catering to a selected group of investment managers, hedge fund managers and financial institution worldwide, the firm offers a custom-made service that is unique and allows its clients to gain competitive advantage in an ever increasingly regulated environment for global registration of UCITS and AIFMD funds.

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