Ask a professional investor where the regulatory perimeter sits in European asset management and the answer is usually a shrug followed by an assumption: that anyone who takes money and calls themselves a manager must be authorised by someone, somewhere. The assumption is comfortable and frequently wrong in both directions. The perimeter in Europe is drawn around defined activities, not around job titles, and a good deal of legitimate work in real assets falls outside it. An equally significant amount falls inside it, and is nonetheless carried on by people who have never applied for anything. Knowing which is which is not a compliance formality. It determines whether the arrangement an investor has signed is enforceable, bankable and capable of surviving a sale process.
The perimeter follows the activity, not the label
European frameworks differ in their detail from one member state to the next, and nothing in this note should be taken as describing the position in any particular country. What they share is a structure. Regulation attaches to activities carried on by way of business, defined functionally, and it is indifferent to what the parties call themselves in the documentation. A vehicle described as a club deal, a co-investment, a joint venture or a partnership is assessed on what it actually does: whose capital it holds, who decides how that capital is deployed, and who was approached to put money in. Renaming the arrangement changes nothing. Neither does the sophistication of the investors, although in most regimes it changes the marketing rules that apply once the activity is already regulated.
This matters because the drafting instinct in private real estate is to describe economics precisely and roles loosely. The roles are what the perimeter tests.
Activities that ordinarily require authorisation
Four families of activity sit inside the perimeter in most European jurisdictions, in one form or another.
- Managing a collective investment undertaking. Capital raised from a number of investors, deployed according to a defined investment policy for their benefit, where the investors do not exercise day to day control over the assets. That is the classic fund, whether it holds securities, property or infrastructure, and managing it is a licensed function.
- Discretionary portfolio management of financial instruments. Authority to buy and sell on a client’s behalf without seeking instruction on each transaction.
- Advising on financial instruments. Personal recommendations concerning shares, bonds, units in collective vehicles, derivatives and similar instruments. The distinction between advice and information is narrower in practice than most people assume.
- Arranging, receiving and transmitting orders, and marketing units or shares in investment vehicles. Introducing investors to a fund is itself a regulated act in most regimes, even where the introducer never touches the money.
None of these depends on remuneration structure. A performance fee does not create a regulated activity, and its absence does not remove one.
Work that ordinarily sits outside it
A great deal of what happens in direct real estate is not investment business at all, because the underlying asset is not a financial instrument and there is no pooling of third party capital.
- Advising an investor on property they own directly. Acquisition analysis, underwriting a building, negotiating price and terms, sitting opposite the vendor. Bricks are not securities.
- Operating partner services on a specific asset. Business plan, leasing strategy, capital expenditure programme, tenant negotiation, oversight of the property manager, monitoring of covenants and reporting to the owner.
- Structuring and administering the company that holds the asset. Incorporation, share classes, board composition, intra group agreements and the ordinary discipline of governance design in a Dutch holding structure are corporate and tax matters, not investment services.
- Arranging asset level debt on a specific property, subject to national credit intermediation rules, which vary and which bite hardest where consumers are involved.
The qualification is important. Several member states regulate estate agency, valuation or property management under their own domestic regimes, and some extend investment style rules to interests in property vehicles that would not be caught elsewhere. Outside the investment services perimeter does not mean outside regulation altogether.
Where the line is actually crossed
Trouble rarely arrives through a decision to operate without a licence. It arrives through drift. A single investor mandate works well, so a second investor is admitted on the same terms, then a third who is unconnected to the first two. The manager, who began by executing the owner’s instructions, starts selecting assets on their own judgement because that is faster. A note describing the pipeline is sent to a wider list. At no point does anyone decide to run a fund, and yet the arrangement now pools capital from unconnected investors, deploys it under a defined policy at the manager’s discretion, and is being brought to the attention of people who are not yet in it.
A second crossing is quieter. The property is not a financial instrument, but the shares in the company that owns it usually are. Advising a client to subscribe for equity in a holding company, or to sell their interest to an incoming partner, can look very much like advising on a financial instrument, even where every conversation was about the building.
A regulator does not read a term sheet for its title. It reads it to establish who decides, whose money is at risk, and who was told about it before they invested.
Why an unlicensed counterparty becomes the investor’s problem
Investors tend to assume that authorisation is the counterparty’s regulatory exposure and therefore the counterparty’s problem. In practice the consequences land on the asset and on the people who own it.
Arrangements entered into in the course of an unauthorised activity may be unenforceable or voidable in some jurisdictions, which is a poor foundation for a structure meant to last many years. Banks decline to lend into vehicles whose management arrangements do not stand up to their own onboarding checks, and existing lenders read the same facts into their covenants. Auditors ask questions that are awkward to answer. Insurers decline cover for a function the counterparty was never permitted to perform. Institutional co-investors withdraw rather than explain the position to their own committees.
The most expensive moment is exit. Buyer’s counsel reviews the management arrangements, forms a view that a regulated function was performed by an unauthorised party, and prices that view into a retention, an indemnity or a reduction. The seller absorbs it. There is no mechanism by which an investor is compensated for a structural defect that was present from the first day and discovered on the last.
How a firm that respects the line is organised
The practical answer is separation of function rather than avoidance of the activity. Where a mandate genuinely requires a regulated function, the sensible structure brings in a party that holds the relevant authorisation and lets that party carry the function and the accountability that comes with it. An appropriately authorised manager takes the regulated role, with its own governance, capital requirements and supervisory relationship. The operating partner takes the asset level work: underwriting, business plan, execution, reporting. Fee arrangements follow the same split rather than blurring it.
Three habits tend to distinguish firms that take this seriously. They prefer dedicated mandates with identified owners over pooled vehicles assembled from whoever is available. They put the boundary in writing, in the engagement letter, describing what the firm does and, more usefully, what it does not do. And they stay out of distribution entirely, leaving the marketing of any regulated product to the party licensed to market it.
Montclare works on that basis. We act as adviser and operating partner on directly held real estate and asset platforms, and we structure and govern the companies that own them, which is the scope set out across our services. We are not a fund manager and not a regulated investment adviser. Where a mandate calls for discretionary management or a collective vehicle, the licensed party is brought in and performs that role in its own name.
Questions worth putting to a counterparty
- Who exercises discretion over acquisition and disposal decisions, and is that recorded anywhere other than in practice?
- Is capital being pooled from investors who are unconnected to each other?
- Which entity in the chain holds an authorisation, in which member state, and for which activities?
- If the firm relies on an exemption, what is the nature of that exemption and what would cause it to fall away?
- Who is permitted to approach new investors, and what has already been sent to whom?
- If the licensed party resigns, what happens to the vehicle, and how long does a replacement take?
None of these questions is hostile. A counterparty that has thought about the perimeter will answer them in a few sentences and produce the documents that support the answers. A counterparty that has not will explain why the questions are unnecessary, which is itself the answer.
Montclare works as an operating partner and structuring counterparty on European real estate and asset platforms. Our approach is set out on our asset management page.
This article is informational. It does not constitute investment advice, an offer, or an invitation to invest, and it is not a financial promotion. Regulated activities are carried out only by appropriately licensed parties.