The Key to Success for Raising Capital in Europe 

Setting up onshore is one of the most crucial steps to ensure success of your activity of raising capital in Europe. But it is not the only one. Traditionally, investment funds are not just bought by investors. Raising capital in Europe will require some significant marketing and solicitation activities for your European investment funds. Here is where a combination of regulatory and commercial considerations come into play. 

Let’s look at the regulation first. The act of soliciting investors in Europe, same as everywhere else in the world, is a regulated activity. This means that where you don’t have the appropriate licensing in place already to carry out this activity in Europe, you may need third parties to either lend you the license or carry out that work for you.  

Before we look at these options, it helps to consider some of the less apparent realities of Europe. The so-called single market is made up of different countries. Whilst it is true that there are no barriers to the free movement within the single market of European goods and services – and that applies to European investment fund too – there remain nevertheless differences in languages, customs and business practices across the various member states.    

Third party marketers 

Before even thinking of raising capital in Europe by yourself and obtaining for the purpose your own investment services license – MiFID license in jargon – it might make sense to look at hiring some third-party marketers, amongst the other options available. Third-party marketers do exist also in Europe and can be a good way to kickstart raising capital in Europe.   

From a commercial perspective, third-party marketers are in the business of investor relations. They traditionally act as pre-screeners of investments for a selected pool of investors, with whom they have a long-standing relationship. From a regulatory perspective, they are regulated investment firms. The ones who are more valuable are the ones who are licensed and have a wealth of different language skills within their teams. These are also the ones who are most difficult to find.  One word of caution here though – don’t treat third party marketers as any other service provider for your European investment fund. 

Leasing a European License for Investment Services 

A trend developed in Europe in the aftermath of Brexit (i.e. the withdrawal of the UK from the European Union) is the one of the MiFID tied agent arrangements. If you have already experience and contacts to carry out the activity of raising capital in Europe by yourself, in one with sufficient ability to bear the cost of the tied-agent arrangements with MiFID entities offering the service in Europe, this route represents a viable option to gain access to investors. Over the course of the past few years since Brexit, it was also possible to identify some specific European domiciles where it makes more sense to look for these types of arrangements. Local substance requirements involved with setting up the tied agent structure, in one with related costs, might still make sense compared to having a proprietary licensed European entity.  

From a technical perspective, tied agents derive their authorisation to provide certain specific investment services from the principal firm they represent. They do not need to undergo a distinct authorisation process themselves. The MiFID directive defines tied agents to be either natural or legal persons. They operate under the full and unconditional responsibility of one investment firm only and their role is to promote investment and other ancillary services on behalf of the principal investment firm they work for. In a very restrictive interpretation of the provisions of the MiFID directive, tied agents are merely extensions or allies of the principal firm. Despite this strict technical definition, tied agent arrangements have been used to provide regulatory cover to firms for activities of raising capital in Europe for proprietary investment funds.  

Setting up your own investment services firm 

If you are bullish and committed to Europe, it might make sense to plan the set up a proprietary investment firm with a local license at some stage. In this regard, tied agent arrangements are helpful with getting acquainted with the business customs and the regulation of a specific European member state. This always helps when taking a longer-term decision like this one, because choosing the right member state in Europe for such an endeavour is always helped if you have on the ground direct expertise. 

The decision to establish a proprietary MiFID entity in Europe is of course not anything that you would want to consider at the very outset of your journey of raising capital in Europe. Even when you have already hit a certain critical mass in your home country and have considerable related experience of investment services and fund management, it may make sense to wait until you are acquainted with a specific member state in Europe before taking this step. The traditional approach adopted by US fund managers in the past, where European investment services operations would be set up in London, became no longer a viable option with Brexit. For not there being yet a continental European capital to replace London as a global hub in Europe, it makes sense to have tested or rented a solution before deciding for a long-term commitment.  

Conclusions 

Whilst it is not a capital raising strategy, not in Europe nor elsewhere, no conversation on raising capital in Europe could ever be complete without making a reference to reverse solicitation.  

Reverse solicitation is an uncodified principle, whereby the rules of the offer of investment products do not apply in cases where no offer of these services or products is being actively made to investors. Instances of reverse solicitation do exist in Europe, but true cases of reverse solicitation are increasingly more exceptional nowadays. These coincide with an investor expressing an interest in learning more and potentially buy in certain investment services or products without having been solicited in any way by the offeror explicitly about these products.