Fundraising in Europe and What Alternative Asset Managers Need to Know

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Christy: Hello, everyone, and welcome to today's webinar, "Fundraising in Europe and What Asset Managers Need to Know." My name is Christy DeMaio Ziegler, and I will be your host from the CSC Webinar team.

Joining us today is Brian Campion. Brian is a commercial director at CSC who will moderate our session utilizing his experience as an AIFM specialist, tax advisor, and fundraising expert. And with that, let's welcome Brian, who will introduce our fantastic panel for today.

Brian: Christy, thank you very much for the kind introduction. As mentioned, my name is Brian Campion. I'm a commercial director within CSC based in Luxembourg. I am a very proud person today to be able to moderate this panel. I will introduce starting with Felicity Beasley, who is the Head of Distribution for Urban Partners, Urban Partners being a Nordic multi-strategy manager with a historic preference in the real estate sector, in recent years going into venture capital and private debt. Felicity, welcome to the webinar.

Johannes Höring, who is the Head of the AIFM here in CSC in Luxembourg. I work with Johannes on a day-to-day basis and whom I have a lot of respect for. Johannes, welcome to the webinar.

And last, but not least, Guilhem Becvort, who is a partner in White & Case in Luxembourg, who has focused on the tax advice side of the investment fund work. Guilhem, I know you're expanding the White & Case office in Luxembourg and the partnership is growing, so I wish you the best of luck going forward into the future.

Now, given the fact that we have somebody coming from the distribution side of a fund manager, we have a specialist coming from a third-party AIFM, and we have a tax advisor, I personally thought having all three aspects coming into play would really provide a full picture to the audience when it comes to the topic of what we're discussing today of fundraising and marketing within the European Union.

The agenda for today will be fundraising and trends in alternative asset management, where Felicity Beasley will concentrate on. We will have AIFM regulation and compliance for Johannes Höring, and tax considerations while marketing in Europe for Guilhem Becvort.

Now keep in mind, for the viewers, this is an interactive webinar. There will be a Q&A. And throughout the webinar, we'll also have some poll questions that we will request your opinion on.

Now I ask Felicity to enter the stage. Felicity, I want to set the stage . . .

Felicity: Hi, Brian.

Brian: How are you, Felicity?

Felicity: I'm very well, thank you. Looking forward to this.

Brian: Perfect. I wanted to set the stage and really speak about investor preferences, giving your experience on the distribution side of our business. Can I ask what you're seeing in terms of investor preference, in terms of demands coming from investors? Has it remained the same in previous years, or do you see this evolving going forward?

Felicity: Thanks, Brian. Well, I think it's been a very challenging couple of years being within the distribution side of the business, and I'm sure that we've heard of the fundraising pain everywhere and got to a point where the denominator effect became something that haunted our dreams I think at night. But we're starting to see some recovery now, and it's a really interesting time because I feel that there's much more active dialogue from LPs and also GPs. It's great to listen. They're out day and day out kind of talking to LPs and getting the feedback.

So really to approach this, I'm thinking about it in sort of three buckets. So first is what sectors are investors really looking at and thinking about at the moment? Are they still focused on beds and sheds? Where are they in the risk spectrum? Again, heard a lot of about credit over the last couple of years, but, you know, where is that really landing? And then I think the third aspect is really about kind of where the LPs are coming from and what they're looking for in terms of maybe structure and setup, which hopefully will be interesting for the later part of the conversation, when we get into the sort of technical side of delivery for investors and in alternatives.

So sectors, yes, they're still interested in beds and sheds, but I'm hearing more signs of interest in maybe tentatively looking at offices again and retail. On a very selective basis, but offices I think, particularly in Europe, are looking quite interesting from entry point, but it is going to be selective, probably very much focused on those core central locations around CBDs. And are there any other opportunities within offices to look at maybe some form of brown to green transition, or certainly some places looking at alternative uses for those offices, maybe even around the life sciences sector?

Again, retail is starting to come back as something potentially to look at. Again, the yields look interesting, but it's going to be really selective. Residential still seems to be strong, but I think there's a focus on the niche sectors within it, so again still student housing, looking more at health care, the affordable housing element. You know, these are areas that we have heard of a lot over the last couple of years, but I think investors are really getting into the detail of them and also how that links with kind of a wider infrastructure approach. And then the final part is really data centers and life sciences. I don't think I've been to a single conference in the last 12 months where both of those aren't being mentioned.

Risk wise, as I mentioned, credit, I think they're still looking at credit on the equity side. The last couple of years if investors are going to look at real estate, they've thought really value-add and opportunistic capital. That's still there, but there are murmurings now of core starting to look to come back. Obviously, we need core capital too to exit the value-add from, so that's a good sign.

And then, finally, really just the LP side, I feel that that's been quite bifurcated in terms of what they want structure-wise. I think you've kind of got a market where you've got these large mega funds, which investors , I guess, is a bit of a flight familiarity, but then at the other end looking at really niche operators or niche strategies where some LP capital is backing very much the operational model. So it's a bit of a fundraising bifurcated. The sort of middle-size structures I think are still causing a little bit of consternation for LPs.

And when I look at where their capital is coming from globally, we are very much looking at east. It's Middle East and it's Asia predominately for capital coming in into Europe. Europe is still a little bit quiet, and the U.S. still very returns driven, so they need to be getting that mid to high teens return at minimum to look to really put capital into Europe.

Brian: Interesting. You had mentioned green transition in your response. Something I definitely wanted to bring past you was ESG considerations. And what I really want to know is how important is ESG to your existing investor base and prospective investor base, and what is Urban Partners doing to integrate ESG considerations into your fundraising offer?

Felicity: Yeah, it's a great question. I mean, from an Urban Partners' perspective, it's very much built into our DNA. Our view is that the climate battle is going to be won or lost in cities. That's very much kind of how we approach our investment, approach to investment across everything that we're doing on the equity side.

I'll come into a bit more detail in terms of Urban Partners specifically. But to address the question of LPs, if I think back over the last kind of 5 to 10 years working in the industry, it was a checkbox exercise. It was definitely coming through. Obviously, we've seen benchmarks, like GRESB, where investors are expecting managers to be tracking reporting. But it felt a bit more tick box.

What I'd say I feel over the last sort of couple of years is that's very much moving on to being more evidence-based. What is the measuring? What is the monitoring? What are the outputs? I think investors want to see the case studies, but they want to ensure that there's not greenwashing going on. So I think the industry is at a bit of an inflection point between knowing they need to do something about it and putting resources to it. But the scale of that and what you need to do is significant. And investors I think are really asking: What are your sustainability teams? How are your practices embedded into your investment philosophy, into your IC process? And I'd say that's been the shift. I think there's a lot more kind of really asking for the substance behind approach to sustainability.

Brian: Interesting. Now the thing is I'm a firm believer in keeping everything positive in life. But within every market, you obviously have challenges. And something I wanted to ask you is have you come across any challenges recently in terms of going out and raising funds from potential investors? And obviously, looking at Urban Partners as a fund manager, you've been very successful down through the years. From what I know, you have over €21 billion in assets under management from today, and that's only going to grow. So I'd like to know what have you done to overcome any challenges on the distribution side?

Felicity: Yeah, I mean, look, I think I'm sure everyone sort of participating on this call will be very aware that the last two years have been very torrid for fundraising in real estate. Real estate is a small sector within investors' allocations as a whole. So whilst we're in the industry and we're always presenting the case of real estate, you've got to think that a lot of the LPs are putting capital in the large pension funds, or they're insurance companies with huge balance sheets and different liabilities that are driving their investment needs.

So we're one tiny bit of that overall pie that they're looking at. And the last couple of years it hasn't looked so good for real estate. When corporate bonds are looking very interesting, a lot more safe, a lot more secure, why put your money into real estate? So I would say whilst we continue to be out talking to LPs, one of the biggest challenges is really presenting the case for real estate against the backdrop of all the investment options that investors have got at the moment.

As I mentioned to start of the conversation, denominator effect kind of haunted us. Over the last six months, I'd say it's started to simmer down a little bit. We don't hear that in every single LP meeting, and there is definitely more of a movement now to like look to unlock those allocations. But yeah, I mean, I'd say that has been the biggest challenge is really unlocking it.

And then maybe just a final point on that is because the industry has had a very challenging few years, we've not been seeing the distributions coming back, which has also limited investors' ability to recycle. In a healthy, functioning market, distributions come back, allocations are set, and there's always a bit of a roll-on effect there. But some investors that I've spoken to have put in say redemptions into open-ended funds, and they're not getting the money back, so they can't look to reallocate it. So there's constraints on both sides there.

Brian: Very good. There's one thing I always try to speak about when I'm in conversations with business development or distribution fundraising sides of our business is probably a more impossible question about the future outlook. Do you see or foresee any future trends directly coming up in the real estate sector linked into the fundraising sides?

Felicity: Yeah, definitely. I think one of ones I touched about before was really about the bifurcated market between. So I think we will see the funds getting bigger. I think there will be more consolidation within the GP market, and I think we will see bigger funds. But then at the other end of the spectrum, I do think where you've got very strong operators, I think LPs will still back those niche strategies, where you've got a real expertise. So this kind of operating model, owning the value chain, I do see that continuing.

If I think back to when I started my career 20 years ago, I think investors used to think real estate is very passive. Let's buy a nice Grade A office building, let it out to a good tenant on a 15-year lease, with a fixed rent review, and then kind of let it roll. That not there anymore. You have to have alpha. You have to be customer centric. You have to know who's actually paying that income that's coming into your building. And so I think there's a recognition that they're the successful assets.

The other in terms of kind of the market and it'll be interesting to see if my colleagues on the call day talk about it, but we're starting to see the kind of GP-led recapitalizations as opposed to being LP-led. And I do see that growing. And you see some of the big funds that have been raised out in the market, your Ares and your Goldmans, where they're raising secondaries funds and recap funds. And I think that's to really enable . . . Some of the GPs are very good, they set up operating platforms to actually keep that expertise there. Recognition takes a lot of effort to set those up, so you don't necessarily want to just sell it at the end, but also to give some LP flexibility. So I think that's quite an interesting and actually exciting trend for both LPs and GPs to have that capital. So that's my crystal ball.

Brian: I knew it was a fantastic idea having you on this webinar. Johannes, you're managing director and leader of CSC's third-party AIFM based in Luxembourg. Similar to what I asked Felicity, I want to set the stage by looking at what the current trends are within AIFM regulation. Can I ask you to elaborate?

Johannes: Yeah, thank you, Brian, with pleasure. So what we see currently in the market on the trend, on the compliance side, requirement side, regulatory side, but I would like also to outline the interlink with the operational aspects.

So first of all, I would like to touch upon AIFMD II, to revisit the changes we are seeing there, which affect also the AIFM business. I would like to outline there especially the application to changes for non-EU AIFMs, authorization of the AIFM as such and delegation. Loan origination regime is newly introduced. Liquidity management tools have to be considered in depositories. I will make you a concrete example when we are looking into fundraising for example.

U.S. managers are also looking into fundraise or deploy, and from an AIFMD perspective, so from a pure regulation perspective, it creates an overlay of scrutiny and cost not necessarily the U.S. manager would be familiar with it. But the AIFMD is a tested system. It's working. The regulatory framework is continuously evolving. So I will give also some other examples at the end. And local knowledge, especially here Luxemburg and in other European jurisdictions is key.

The upside of AIFMD as a regulation is that it's a regulation for investor protection. For sure, we are seeing with new asset classes new geographies to be explored, fundraising activity across different strategies, also more and more the likelihood that managers and parties are looking for outsourcing or co-outsourcing, which lead then to the result of a demand of higher outsourcing controlling. So the pressure here, from a regulatory side, is constantly increasing.

Further, we have currently on our agenda DORA and ESG. Felicity already mentioned ESG in this respect. But I just wanted to outline that DORA is applicable for AIFMs and also for certain other financial sector players. We have here aspects to be considered on risk management, ICT risk management in specific, notifications, legal requirements on the contracts, and so on and so forth.

Brian: Interesting. Now I assume every investment manager that's watching this, whether you're already within the European ecosystem or you're looking to come into the European ecosystem, one of the main questions I would personally have is how do I get access to the limited partners' capital. I think the next two questions are very much linked around this because I'm speaking about cross-border fundraising, and I'm also speaking about marketing notifications. Can I first ask you on the cross-border fundraising, as an investment manager, what should I be thinking about, what type of challenges are involved when it comes to cross-border fundraising within Europe?

Johannes: So first of all, let me introduce, Brian, the two regimes we have here, that have been introduced in October '21 by the EU. First of all, it's the Cross-Border Distribution Directive, and the other one is the Cross-Border Distribution Regulation.

Very important out of the first one, so the Cross-Border Distribution Directive is a better understanding what is a pre-marketing activity. Why is this so important? Pre-marketing helps the managers for fundraising to test a market if the fund to be launched, that is for sure AIFMD compliant, will raise enough capital, will find the respective investors.

So how is it working? The benefit of it is to ensure that you have a wide definition of pre-marketing and the marketing information, which we are able to send over to the regulator, especially for those funds that are not regulated, not supervised. We are benefiting from the passport of the AIFM as such. So everything what is marketing and notification will be under the passporting of the AIFM. So therefore, we do not need and this was clarified for pre-marketing to submit constitutes subscription documents or final offering documentation. Sometimes it's simply enough to present the idea of the fund to be introduced, which then helps the initiator of the fund to find out and to test the market.

Brian: I want to speak a little bit about risk management, but before I do, is there anything else you want to mention in terms of marketing notifications? Or shall I move on?

Johannes: Well, marketing notifications, why is it so . . . well, let's say why should we go for outsourcing as well? This might be also a question a lot of initiators may raise. So we have here pros and cons to go for that route. For example, why should I use a third-party AIFM. As I mentioned before, for non-regulated, non-supervised funds, you need to have the possibility to benefit from the passport of the AIFM.

To create your own AIFM is very costly. It takes time. And the flexibility might not be there. You need to have regulatory capital requirements to be fulfilled. So therefore, most of the initiators, they are going for appointing a third-party AIFM also for pre-marketing services. This means we have the flexibility, we have the possibility to have specialized teams with the necessary skills. We are able to know the difference in the notifications, what you need to do to notify vis-à-vis the home national competent authorities.

Brian: Understood. I do want to touch on risk management, given the fact that risk management is one of the two major functions within any AIFM based in Europe, along with portfolio management. And the reason why I want to speak about risk management is because there is economic uncertainties within our geopolitical world at the minute, and I want to understand what strategies are AIFMs putting in place to manage potential risks going forward.

Johannes: So first of all, there you need to understand risk management for the company as such, for the AIFM and risk management for the funds. For risk management for the funds, everything starts with understanding the risk profile of the underlying AIF. because we are facing a wide spectrum, a wide range of risks, market risk, credit risk, business risk, counterparty risk and so on, operational risk. The core risk we have for alternative investment funds is liquidity risk. Therefore, also the regulator went out several times with CSAs, asking how are you able to monitor liquidity of the funds, how you're managing it. AIFMD II has liquidity management tools as well as one of the topics for changes.

And to monitor these ones is on an ongoing base. We have to fulfill all the requirements every time for subscription redemption during the time. And to have a strategy defined within the AIFM how to monitor it is very key, and this is also subject to supervisory authority reviews.

Brian: Johannes, I've given quite a few presentations on risk managing and marketing over the last years, and I must say I couldn't have said it better myself. To talk about tax structuring and tax advice for European structures, let's go with tax structuring trends. What do you see are current trends in tax structuring within the alternative investment fund industry in Europe?

Guilhem: Thanks, Brian, and that's a very interesting question. And if we look at the tax structuring trends, we would, in fact, be very well aligned with our colleagues from fundraising and the more regulatory spectrum. And I fully agree with Felicity and Johannes that future stricter regulation is something which is actually already the case in taxes.

So the first thing would be there are a lot of changes, there are lot of new regulations and so on. So the first thing that I would think about is adapt to change. There is an increase also in the Luxemburg footprint on the structures that we see, and we can discuss that in more details then. And last, but not least, substance and governance of Luxembourg or international entities.

So if we start with the work on the governance and on the substance, we see more and more aligning economic flows with the legal documentation. We also have a lot of questions and structuring work, from a tax standpoint, to have a sustainable governance, sustainable substance, sustainable structures below the investment funds. And within an international context, you also need to ensure that there are sufficient operational means on the ground at the level of the various entities that are engaged on the investment fund structures.

We also see a consolidation in terms of jurisdictions. You were mentioning the use of third-party AIFMs. In Luxembourg, we have the funds in Luxembourg. We have the AIFM in Luxembourg. We have also investment advisors in Luxembourg or elsewhere. We also have all the holding structures that sits below the funds, and we see more and more increase in terms of activities that are performed there. We are moving from sole holding entities, from entities who are engaged in shareholding activities, financing activities, receiving and providing services and so on. And so we really see an increase in the sophistication of the structures, the needs that our clients have, which also needs to align with the change in the legislations and the regulations.

Brian: It's fantastic to see you agreeing with Felicity. It's always nice to see the tax structuring side of our business agreeing with the fundraising side of our business. And I think going into my next question, it's also interesting for Felicity and anyone involved in the fundraising world to listen to because it's very much based around what regulatory impact is coming in the fundraising world. Are there any upcoming regulations that should be noted, that could have any impact in fundraising going forward, Guilhem?

Guilhem: Well, I agree with all you said, Felicity. It was music to my ears. So consolidation of funds, getting bigger secondary deals, and there is also one strong word as a fundraising trend is retail utilization. It's not a new regime. It's not to be a regime, but it's actually a new regime that I would mention here. It's ELTIF 2.0. The aim of this new regime is to be able to onboard retail investors into the funds. So we see a lot of interest from our clients for this new regime because it also allows to increase the investors base and the potential is quite huge in the world for the private capital industry.

So the ELTIF 2.0 regime is live from January this year. We've received a lot of questions over the past months, and we had a very busy start of the year setting up this type of structure. And it's very interesting for our clients. The previous regime was mainly used for asset managers engaged in-depth strategies, and now the new regime also allows to increase the level of LPs that can be onboard on that type of structure. And it's also very positive to find structuring solutions for the clients also on the tax and structuring work that we are doing for our clients who are engaged in that type of very fascinating project.

Brian: Completely agree with you. Now before I let you go, I have two questions. Having you on this webinar, I couldn't not ask these questions given your experience and expertise very much revolved around tax compliance, number one. What do fund managers need to be thinking about in today's world in terms of is there challenges on the tax compliance side, and how do they navigate these effectively?

Guilhem: Okay, I have a short answer to your first question is that they have much to look at. That's the truth. If you think about the past years, there are Anti-Tax Avoidance Directive 1 and 2. There are mandatory disclosure rules with DAC6. There is now a new directive on Pillar Two, which can also have an impact on investment funds structures. There is also an increase in transfer pricing documentations and so on. So there is a lot, a lot, a lot in the plate here.

My main advice to my clients and I always say that it takes 10 years to be a good tax lawyer, and you cannot be a good tax lawyer because that's not your job. So really the key thing I think is to keep informed, keep curious, and I think assisting to this webinar is a good start. And then people need to understand what are the key aspects and how this can affect their structures and then seek advice.

Brian: I couldn't agree more. And it brings me into my last question, which is obviously a very important question for our audience in terms of tax incentives. Why is Luxembourg such an attractive domicile? Are there any new tax incentives or schemes coming into Luxembourg that the audience should be made aware of?

Guilhem: That's a good question. I think now the way the Luxembourg financial center has evolved over the years is really to increase what is feasible in Luxembourg. So you cannot today speak only on the tax aspects of things. You need to consider the regulatory one. You need also to embrace what is the full Luxemburg toolbox that can be offered for alternative investment fund managers.

The trends over the past years in terms of new regulations and taxes, and you will note that I'm not mentioning tax incentive, the main trends were the implementation of the new EU directives, which were also implemented in Luxembourg, which also means that when you are setting up a structure in Luxembourg, you are compliant with all the regulations and directives within the EU, which means that we are on a level playing field in Luxembourg and we can offer structures that are on the top of the art of the regulation if I may say.

There were recent new developments in Luxembourg with respect to new tax legislation, and we are more now on a domestic momentum, where we have new bill of laws coming into the tax legislation and maybe three to be mentioned. The first one is the decrease of the corporate income tax rate in Luxembourg by 1%, and this will start on the first of January of next year. The second one is an amendment and a flexibilization of the participation exemption regime in Luxembourg where the taxpayer can opt on a yearly basis to apply or to opt out of the application of the regime. And you may have the question why do certain taxpayers want to opt out for the participation exemption regime, and then that means that they are able to use tax losses carried forward that otherwise they may lose. And maybe the third one is the reduction of the minimum net worth tax, which can also have an important impact, especially for managers using a significant number of SPVs in different strategies.

These are the three main new legislation that we have, and the government is working on new ones, so stay tuned.