Reverse enquiry under AIFMD

I’ve heard about restrictions on managers marketing funds in Europe under AIFMD. What are these?

Under AIFMD, in order to market alternative investment funds (“AIF”) such as hedge funds into the European Economic Area (the “EEA”), which does not include Switzerland, alternative investment fund managers (“AIFM”) must either be authorised (only possible for managers in the EEA in respect of European funds) and access the pan-European passport or, where possible, notify or register the non-EEA AIF in the relevant jurisdiction(s).

So does AIFMD prevent me from investing in AIF?

No. AIFMD expressly states that it does not affect the pre-AIFMD situation whereby a professional investor established in the EEA may invest in AIFs on its own initiative, irrespective of where the AIFM or the AIF is established.

Who is a professional investor?

A professional investor is anyone falling within the definition of Professional Client under the Markets in Financial Instruments Directive. The definition covers most types of institutional investor.

What does investing in AIFs on ‘its own initiative’ mean? The ‘own initiative test’ (or ‘reverse enquiry’ as it is also known) means that as long as the initial initiative to invest (and, as part of that process, each initiative to make a request for information or documentation) was taken by the investor rather than the manager (or someone acting on behalf of the manager), the manager can accept the investment (or, as part of that process, the request for information or documentation) from the investor. For example, where the relevant investor has contacted the manager (or someone acting on behalf of the manager) and requested information about the AIF without first having been approached by the manager (or by someone acting on behalf of the manager), the manager is able to provide the requested information, which may subsequently lead to an investment.

Is there a common definition of ‘own initiative test’ or ‘reverse enquiry’ in the EEA? No, unhelpfully, the position as to what is meant by the ‘own initiative test’ or ‘reverse enquiry’ is different across the EEA. However, there are commonalities and, as a general rule, the more specific the investor’s request is as to the AIF and the documents or information the more likely it is that a manager (or someone acting on behalf of the manager) can accept the request.

So unless I make a specific request, I may not get the same access to information as before the AIFMD came into force?

Correct. On the basis of the above restrictions, there are a number of managers that will now only deal with investors established in the EEA on a “reverse enquiry” basis. In particular, the internal policy of the relevant manager may mean that it is only permitted to send documents or information to you about its AIFs, upon receipt of a specific request from you naming the relevant AIF and specifying the type of document or information you wish to receive.

Once I’ve made one request, can the manager then send me all information? No. Many managers will only send documentation which has been specifically asked for. If you require any further information, then you may need to make a further specific request for it.

What practical steps could I take in order to ensure that my request is specific?

The following steps should be taken:

• Make a written request – ie contact the manager in writing;
• Be as precise as you can as to the AIFs in which you are interested (ideally you should name each AIF in relation to which you would like to receive information); and
• Set out the information or documentation you would like to receive in respect of the manager and each AIF. - For example, specify that you would like to see:
  • In respect of the manager:
  • due diligence questionnaire;
  • risk reports;
  • investor presentation, including information about the various investment strategies that the manager pursues;
  • summary details of the AIFs that pursue those strategies (names, jurisdictions, fees/liquidity terms); and
    past and, on an on-going basis, any future investor newsletters and/or fund fact sheets prepared by the manager that relate to the AIF[s].
  • In respect of the AIF[s]:
    • offering memorandum or prospectus,
    • subscription agreement or application form, and
    • annual and any interim accounts prepared by the AIF[s].
• Expressly state that (i) you are a professional investor; (ii) you are initiating contact with the manager; and (iii) your contact with the manager has not been requested or solicited in any way by the manager or any person acting on the manager’s behalf. You may find the following example useful when considering how to phrase such a statement:

“We confirm that we are a professional investor and that by sending this [letter]/[email] we are initiating contact with the manager."

Important note: each jurisdiction in the EEA may interpret the scope of “reverse enquiry” and “marketing” differently (as those concepts are not clearly defined within the AIFMD). Additionally, investors from certain jurisdictions may find that some managers may have specific requirements that they require the investor to satisfy before they are prepared to provide information to them.

This page is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this page.