Do This Before You Start a European Investment Fund 

As you get closer to Europe and more acquainted with its rules and customs, there are a few things you want to do before you take the commitment to start a European investment fund. In addition to having chosen already – or at least acquired some understanding of – the member state in Europe where to start a European investment fund, there is one more important step to take. 

Regulation governing financial services and capital raising in Europe is full of acronyms. The main regulations on European investment funds, fund management and financial services are all identified with acronyms – UCITS, AIFMD, MiFID. For what concerns funds, there is a clear distinction between UCITS and so-called AIFs (i.e. alternative investment funds). Recently Europe also introduced another category of long term investment funds called ELTIFs.

Jargon aside, it is imperative that based on your actual strategy, you get crystal clear about the type of European investment fund you want to start. This will dictate the success of your activity of capital raising in Europe.  

What is a UCITS? 

Most US fund managers are familiar already with the UCITS acronym. If you want to start a European investment fund you better be familiar with it too. This is because, even though you deal with alternative investment strategies, for instance, understanding the main features of UCITS will help with drawing the distinction with other categories of European funds.  

UCITS stands for Undertaking for Collective Investment in Transferable Securities. It is one of the most successful brands in Europe and across the world. Born with the retail investor in mind, over time UCITS became the preference also of professional investors. This type of fund can only be established in Europe and is characterised by concentration and diversification requirements, high liquidity and a series of eligible investments, mostly revolving around the traditional equity bonds and cash. The UCITS standard is nowadays recognised all over the world, where this type of funds can be quite easily sold. The value added from a European perspective is that whilst this fund is authorised in one member state, can then be sold across Europe with the marketing passport.  

Traditionally UCITS can also be structured as umbrella funds with sub-funds. In most European domiciles local law allows for sub-funds under the same umbrella fund to be segregated amongst each other. Coupled with the evolution of independent fund management companies in Europe, this means that if you plan to start a European investment fund in the form of a UCITS, you could also open or rent a sub-fund under an existing UCITS umbrella fund to start with.  

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Alternative Investment Funds (AIFs) 

The concept of alternative investment funds was formalised in Europe with the introduction of AIFMD. For the directive being essentially aimed at regulating the activity of managers of alternative investment funds, the scope of the related rules is not on the products as such, like the UCITS directive, rather on the conduct of business. Nevertheless, we have in the directive some sort of guidance on what can be considered an alternative investment fund in Europe, or an AIF in European jargon.  

In addition to not being an UCITS, an AIF shall have set characteristics. If you plan to start a European investment fund to cater for alternative investments, it pays to know what these are. An AIF shall not be used to run a general commercial or industrial activity. It shall pool together capital raised from investors for the purpose of generating pooled returns for those investors. It shall operate according to a set investment policy and unitholders or shareholders in the undertaking shall not have day-to-day discretion or control on the activities of the AIF. Another important element is that the capital raising activity shall be carried out towards a number of investors. With some exception, funds of one investor only should not be considered as AIFs. 

Whilst the AIFMD gives the main criteria to identify an AIF, it does not introduce a European regime for AIFs. Accordingly, the local legislation of the various member states will provide for corporate and contractual structures to accommodate for AIFs.  

The long-term investment funds

Introduced for the first time in 2015, the European Long-term Investment Fund – ELTIF in jargon – is another type of investment funds in Europe. Whilst it falls under the category of AIFs, the ELTIF is a brand per se. This type of fund accommodates long term strategies that either are relative to the financing of small medium enterprises in Europe or else infrastructure and other real assets or real economy related investment opportunities. For this type of fund having been conceived as an essential financing tool for Europe, at inception it could accommodate only for investment opportunities located geographically in Europe.  

In its second iteration, which will be applicable as of 2024, there will be room for underlying investments also in projects that are not necessarily located in Europe, but from which Europe will nevertheless benefit. For the US fund managers who might want to start an European investment fund of this type, it pays to be more specific about what this fund can actually accommodate. That is not the creation of a solar farm in Texas, for instance, but it could as well be the creation of infrastructure that could benefit Europe at large as well.  

Conclusions 

The choice of the European member state where to start a European investment fund and the actual type of investment fund that you plan to launch to raise capital in Europe are two interconnected choices. The most important ones shall we say. As already mentioned, there is little to no difference when setting up a UCITS in either of the main European gateways. Different is the case when AIFs are at stake. That is because the local laws of each European member state will also govern the type of structure that you will be able to create.