There is a line in European asset management that many people cross without noticing. On one side, an investor manages their own money, or a family manages its own wealth, or a sponsor assembles a one-off club deal. On the other side, a person manages a pooled vehicle for external investors according to a defined policy, and that is an alternative investment fund whose manager falls within a demanding regulatory regime.
What makes something an alternative investment fund
The definition turns on a few elements: capital raised from a number of investors, with a view to investing it in accordance with a defined investment policy, for the benefit of those investors, where the vehicle is not a fund of the type covered by the retail regime. Notably, it does not depend on the legal form, on the asset class, or on what the arrangement is called. A company, a partnership or a contractual arrangement can all be an alternative investment fund.
What is generally outside the definition is a vehicle investing the money of a single family, and a holding company pursuing an industrial or commercial strategy rather than an investment policy. Those exclusions are narrower than people assume, and the family office exclusion in particular stops applying once external money joins.
What follows if you are inside
An authorised manager faces requirements on capital, organisation, risk management, valuation, delegation, remuneration, depositary appointment, reporting to regulators and disclosure to investors. These are not formalities; they are an operating model, with real cost and real staffing implications. This is why the question of whether an arrangement is a fund should be answered before the arrangement is built, not after investors have committed.
Nobody sets out to become a regulated fund manager by accident. A number of people discover they have, at the moment a regulator asks, which is the expensive way to find out.
The smaller manager exemption
Managers below defined thresholds of assets under management may fall under a lighter registration regime rather than full authorisation, with the thresholds set higher where the portfolios are unleveraged and closed for a period. The lighter regime is genuinely lighter, but it is not nothing: registration, reporting and the loss of the marketing passport all follow. Growing through the threshold without having planned for it is a well-worn route into difficulty.
Marketing is the other trap
Even a manager comfortable with its own status can fall foul of the rules on marketing, which govern how and to whom a fund may be offered across European borders. Approaching investors in another member state is a regulated act, and doing so without the appropriate passport or national registration is a breach regardless of the quality of the fund. Reverse solicitation, the argument that the investor approached the manager, is far narrower than it is commonly assumed to be.
Where this meets real assets
Real asset managers meet these questions constantly, because the natural evolution of a successful operating partner is from managing one asset for one investor to managing several for several, which is precisely the path across the line. We deal with the boundary in our note on what requires a licence in European asset management, and with the operating-partner model in our note on what an operating-partner mandate actually involves. The sensible approach is to know where the line is and to decide deliberately which side to be on, rather than to drift across it.
Montclare manages and structures European real assets for institutional and private investors, from acquisition through to exit. Our services are set out on our services page.
This article is informational and does not constitute investment, tax or legal advice. Asset management and investment advice are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.