The National Private Placement Regime provides an opportunity to access a vast pool of capital. But is it cost effective?
The €5.9 trillion EU alternative investment fund pool[1] offers huge potential capital to non-EU investment managers. However, accessing it comes with significant complexity.
Central to that access is the Alternative Investment Fund Managers Directive (AIFMD), which permits several routes to EU investors for overseas general partners (GPs), each with different requirements. The most popular among U.S. managers is the National Private Placement Regime (NPPR). The NPPR can seem onerous but establishing your fund in Jersey—which is outside the EU and enjoys “privileged country” status—is one way to make accessing European capital easier.
Our special report, The Future Private Capital CFO, looks at the strategies being adopted internationally by GPs to remain competitive in an increasingly complex global market.
EU passport vs. NPPR: the two main routes to Europe
U.S. managers looking to raise capital in Europe do it in two main ways. The most thorough route is through AIFMD passporting. This gives GPs the ability to market their funds throughout the EU without having to abide by national rules in each state. But EU passporting is available only to funds domiciled in the EU that employ an EU-based Alternative Investment Fund Manager (AIFM). This adds a financial and administrative burden for overseas funds.
In contrast, the NPPR requires no AIFM or EU hub. For GPs who are new to Europe, or who are limiting their marketing to a small number of EU countries, NPPR is often a simpler and more cost-effective solution than EU passporting.
Managing the risks and complexities
Any route to Europe can seem complex by comparison to U.S. managers, who are likely familiar with more relaxed regimes. The NPPR registration process can be laborious, and there is often a considerable cost of ongoing compliance.
Most importantly, the NPPR involves navigating fund rules in individual EU member states, which can vary widely in complexity. Some states operate light-touch regulatory regimes; others demand far more effort. A few don’t accept the NPPR at all.
For example, some EU states require notification before pre-marketing activity (gauging interest) can be carried out, while others don’t. Full marketing almost always requires notification, which can be via a simple online application or a complex registration process. There is often a fee for this.
Understanding and abiding by the rules in every country can be time-consuming and difficult. That suggests that the NPPR is better suited to U.S. managers and others located outside Europe who want to raise capital in a limited number of EU states. According to the EU, 97% of NPPR-registered funds market to three or fewer countries.
Nor is the NPPR static. Each EU member state retains control over its NPPR requirements, which means that regulations continue to evolve.
How domiciling in Jersey can help
While Jersey follows the AIFMD regime to a large extent, which helps smooth NPPR compliance, there are key areas where simplifications and savings can be made.
For example:
- The lack of a depositary requirement, often mandatory in the EU
- A zero rate value-added tax (VAT)
- Reduced operational and reporting requirements and lower costs associated with AIFMD depositary, capitalization, risk management, and reporting
In addition, Jersey is known as a mature and well-regulated domicile for AIFs, with a sophisticated service-provider ecosystem and a wealth of experience in helping U.S. fund managers access the NPPR scheme. It also offers the limited partnership fund structures U.S. GPs are familiar with.
Still, for U.S. GPs wanting to target investors right across the continent, it may be more beneficial to create an EU-based fund and appoint an EU-based AIFM, allowing access to the AIFMD passporting scheme.
Jersey is approved by the European Securities and Markets Authority for AIFMD passporting in the future, so that will be an option for funds domiciled on the island when third-party passporting rights are eventually granted.
For now, it is a leading center for U.S.-based GPs who favor the simpler but more limited NPPR scheme.
For the complete picture, download our special report, The Future Private Capital CFO.
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