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.
The wording sits in Article 4(1)(a) of Directive 2011/61/EU, and its two limbs are cumulative. An arrangement qualifies where it is a collective investment undertaking, including a compartment of one, that raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and where it does not require authorisation under Article 5 of Directive 2009/65/EC. Article 2(2) then removes three things from the analysis: whether the fund is of the open-ended or the closed-ended type, whether it is constituted under the law of contract, under trust law, under statute or in any other legal form, and the legal structure of the manager itself. Dutch law adds no substantive definition of its own. Article 1:1 of the Wet op het financieel toezicht defines a beleggingsinstelling by pointing straight back at Article 4(1)(a), so the European text is what the Dutch supervisor applies.
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.
Where the exclusions actually stop
Article 2(3) lists the entities the Directive does not reach at all, and holding companies are the first of them. The relief is narrower than the word suggests, because Article 4(1)(o) defines a holding company as one with shareholdings in one or more other companies whose commercial purpose is to carry out a business strategy or strategies through its subsidiaries, associated companies or participations in order to contribute to their long-term value, and which is either a company operating on its own account whose shares are admitted to trading on a regulated market in the Union, or a company not established for the main purpose of generating returns for its investors by means of divestment of its subsidiaries or associated companies, as evidenced in its annual report or other official documents. A private vehicle assembled to buy, improve and sell participations on a defined horizon is measured against that second limb, and the provision names the vehicle’s own annual report as the evidence.
Article 3(1) disapplies the Directive to a manager in so far as it manages funds whose only investors are the manager itself, its parent undertakings, its subsidiaries or other subsidiaries of those parents, and provided that none of those investors is itself an alternative investment fund. That is a group exclusion rather than a family one. The family office position rests instead on recital 7 of the Directive as adopted, which says that investment undertakings such as family office vehicles which invest the private wealth of investors without raising external capital should not be considered alternative investment funds. The operative words are the last four, and we look at that boundary separately in our note on managing family money without becoming a fund manager.
The distinction worth holding on to is between being outside the Directive and being inside it with fewer duties. Article 2(3) and Article 3(1) put an entity outside, the latter in so far as the manager manages such group funds. The threshold provision discussed below does not: Article 3(2) says that only paragraphs 3 and 4 of Article 3 apply to the managers it covers, and it says so without prejudice to the application of Article 46, which is the article conferring supervisory and investigatory powers on competent authorities. A registered manager is a supervised person with a short list of duties, which is a different thing from an unsupervised one.
What follows if you are inside
An authorized manager faces requirements on capital, organization, 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.
The capital figures are in Article 9. An internally managed fund needs initial capital of at least EUR 300 000 and an external manager at least EUR 125 000. Once the value of the portfolios managed exceeds EUR 250 million, the manager provides additional own funds equal to 0,02 per cent of the excess, with the total of initial capital and that additional amount capped at EUR 10 million, and Article 9(5) sets a floor by reference to the fixed overheads requirement of Article 13 of Regulation (EU) 2019/2033, which is at least one quarter of the preceding year’s fixed overheads. Professional liability risk is covered either by additional own funds appropriate to the risk of professional negligence or by professional indemnity insurance appropriate to the risks covered. Authorisation is not quick either: under Article 8(5) the competent authority answers in writing within three months of a complete application and may extend that by up to three further months where the circumstances of the case require it and after notifying the manager.
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.
Depositary, valuation and the supervisor’s file
Article 21 requires the manager to ensure that a single depositary is appointed for each fund it manages, evidenced by written contract, and a manager may not act as depositary. For an EU fund the depositary is established in the fund’s home Member State. Article 21(5a) opens a narrow derogation from that rule: a Member State may permit its competent authorities to allow a credit institution established in another Member State to be appointed instead, where the manager has made a reasoned request demonstrating the lack of depositary services in the fund’s home Member State able to meet the needs of the fund effectively having regard to its investment strategy, and where the assets entrusted for safe-keeping in that national depositary market on behalf of EU funds managed by EU managers do not exceed EUR 50 billion. Even where both conditions are met, the authorities allow the appointment only after a case-by-case assessment of that lack of services, and they tell ESMA when they do. This is the requirement that most reliably turns an abstract classification question into a commercial one, because a depositary has to be willing to take the mandate and to price it, and assets held through layers of holding companies are a different proposition from listed securities.
Article 19 requires appropriate and consistent procedures for a proper and independent valuation of each fund’s assets. The valuation function is performed either by an external valuer independent of the fund, the manager and anyone with close links to either, or by the manager itself, provided the valuation task is functionally independent from portfolio management and the remuneration policy and other measures mitigate conflicts of interest and prevent undue influence on employees. Net asset value per unit is calculated at least once a year; an open-ended fund also calculates at a frequency appropriate to the assets held and to its issuance and redemption frequency, and a closed-ended fund also does so on an increase or decrease of its capital. The depositary of a fund may not be its external valuer unless it has functionally and hierarchically separated the two roles and the conflicts are properly identified, managed, monitored and disclosed to investors.
Article 24, in the wording that applies until Member States apply, from 16 April 2027, the measures transposing the amendments made to it by Directive (EU) 2024/927, then requires regular reporting to the home supervisor on the principal markets and instruments traded and on the principal exposures and most important concentrations of each fund, together with a defined set of per-fund information that includes the percentage of assets subject to special arrangements arising from their illiquid nature, the current risk profile and the risk management systems employed, and the results of the stress tests required under Articles 15 and 16. Article 23 governs what investors are told before they invest and what they are told when it materially changes. A house that already runs disciplined investor reporting and governance finds this a change of format more than a change of habit.
The smaller manager exemption
Managers below defined thresholds of assets under management may fall under a lighter registration regime rather than full authorization, 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.
The thresholds are in Article 3(2), and they are measured across the portfolios a manager runs directly or indirectly, through a company with which it is linked by common management or control or by a substantive direct or indirect holding. The lower one is EUR 100 million of assets under management including any assets acquired through the use of leverage. The higher one is EUR 500 million, available where the portfolios consist of funds that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each fund. Article 3(3) then sets the floor of what a registered manager still does: it registers with the supervisor of its home Member State, identifies itself and the funds it manages at registration, provides information on their investment strategies at registration, regularly provides information on the main instruments it trades and on the principal exposures and most important concentrations of those funds, and notifies the supervisor when it no longer meets the conditions, in which case Member States must ensure that it applies for authorisation within thirty calendar days. Member States may adopt stricter rules, and the provision says so.
The Netherlands has. Article 2:66a of the Wet op het financieel toezicht disapplies the licence requirement of Article 2:65 for a Dutch manager that meets the threshold test and, as a second condition, satisfies at least one of three placement tests: it offers units to fewer than 150 persons, or offers them only against a consideration of at least EUR 100 000 per participant, or gives them a nominal value of at least EUR 100 000 each. That second condition falls away where units are offered exclusively to professional investors. Where it does not, Article 2:66a(6) requires the offer and any advertising or documents holding out such an offer to state that the manager is not subject to a licence requirement under the Act and is not supervised under its prudential and conduct chapters, in the form the AFM prescribes. Underneath all of it sits Article 3(4) of the Directive: a registered manager enjoys none of the rights the Directive grants unless it opts in, and if it opts in the Directive applies to it in its entirety.
Crossing the threshold, and the clock that starts
Whether a manager has crossed is a measured question rather than an impression. Article 2 of Commission Delegated Regulation (EU) No 231/2013 sets out how the total is built: identify every fund managed, determine the value of each portfolio under the valuation rules of the country where the fund is established, and aggregate the results against the relevant threshold. Funds for which the manager has delegated functions out stay in the total, while portfolios the manager runs under delegation from someone else stay out. Each derivative position, including derivatives embedded in transferable securities, is converted into its equivalent position in the underlying and counted at absolute value. The calculation is made at least annually, on a threshold calculation date the manager selects and then applies consistently, using the latest available asset values produced during the twelve months before it, and any later change to that date has to be justified to the competent authority.
Article 3 of the same regulation requires procedures to monitor the total on an ongoing basis, including observation of subscription and redemption activity or, where relevant, capital draw downs and distributions, with the proximity of the total to the threshold governing how often the full calculation is repeated. Article 4 deals with the breach itself. The manager assesses whether the excess is temporary, and a situation is not of a temporary nature if it is likely to continue for a period in excess of three months. Where the manager considers it is not temporary, it notifies the competent authority without delay and seeks authorisation within thirty calendar days. Where it considers the excess temporary, it notifies with supporting information and, three months after the date the threshold was exceeded, recalculates to demonstrate that the total is back below it or demonstrates to the authority that the cause has been resolved.
The Dutch text carries the same clock and adds a piece of cover worth knowing about. Article 2:66a(4) of the Wft requires a manager that stops meeting the threshold condition to inform the AFM without delay and to apply for a licence within thirty days, and provides that the prohibition in Article 2:65 does not apply to a manager that has done so until the day the decision on its application is taken. Read alongside the period the supervisor is allowed for that decision, it is what keeps a fund lawfully managed while its manager becomes authorised, and it is available only to a manager that notified and applied in time.
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.
Marketing has a defined meaning. Article 4(1)(x) calls it a direct or indirect offering or placement, at the initiative of the manager or on its behalf, of units or shares of a fund it manages to or with investors domiciled or with a registered office in the Union. The whole argument about investor initiative rests on that phrase. Where an authorised EU manager markets an EU fund, Article 31 covers its home Member State and Article 32 the others, in both cases through a notification the home supervisor handles within twenty working days, and in both cases to professional investors, subject to what Article 43 allows a Member State to permit towards retail investors. A non-EU manager has no equivalent passport in operation, because the one that Articles 37 to 41 provide awaits the Commission delegated act under Article 67(6) that would set the date from which it applies: Article 42 leaves it to each Member State to allow marketing to professional investors on its own territory alone, subject at least to conditions on compliance with the transparency articles and, where the fund falls within the scope of Article 26(1), with Articles 26 to 30, on cooperation arrangements between supervisors, on the third country where the manager or the fund is established not being identified as high risk for money laundering purposes, and on that country having a tax information exchange agreement with the Member State where the fund is to be marketed and not being listed in Annex I to the Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes, and Member States may impose stricter rules still.
Article 30a is what has narrowed the reverse solicitation argument. Pre-marketing by an authorised EU manager, the testing of professional investors’ interest in a fund not yet established or not yet notified for marketing in that Member State, is permitted, but it may not extend to information sufficient to allow investors to commit, to subscription forms in draft or final form, or to constitutional documents, a prospectus or offering documents of a not-yet-established fund in final form. It has to be adequately documented, and within two weeks of beginning the manager sends its home supervisor an informal letter specifying the Member States and the periods concerned, the strategies presented and the funds involved. Then comes the provision that settles the question in advance: under Article 30a(2), any subscription by professional investors within eighteen months of the manager having begun pre-marketing, to units of a fund referred to in that pre-marketing or of a fund established as a result of it, is considered to be the result of marketing and goes through the Article 31 or Article 32 notification procedure, whatever the approach looked like from the investor’s side.
Where this meets real assets
The sequence that produces the problem is usually banal. One asset is acquired for one investor under a bespoke agreement. A second investor asks to come alongside on the next one, and a co-investment or club structure is assembled for that transaction. A third arrives, the documents are reused because they worked, and a target allocation between sectors or countries is written down because investors reasonably want to know what they are buying into. At that point capital has been raised from a number of investors, a defined investment policy exists on paper, and the two limbs of Article 4(1)(a) are both satisfied. No decision to launch a fund was ever taken. The elements simply accumulated, in the order in which a good business grows.
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.