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Considerations when Marketing Alternative Investment Funds if a “Hard Brexit” Occurs

February 22, 2019


By: Winston Penhall, Reed Smith LLP

This article addresses common questions and concerns regarding the marketing of alternative investment funds in the European Economic Area (EEA), should a “hard Brexit” occur. Hard Brexit is a scenario in which the United Kingdom (UK) fully exits the single market and leaves full access to the customs union along with its membership in the European Union (EU). In contrast, a “soft Brexit” would keep the UK’s access to the European single market (as part of the EEA) and remain within the EU customs union, meaning that there would be no border checks for UK exports, among other benefits.

THE ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (Directive 2011/61/EU) of the European Parliament and of the Council of June 8, 2011, on Alternative Investment Fund Managers1 currently permits EEA-domiciled alternative investment funds (EEA AIFs) to be marketed throughout the EEA to EEA-domiciled or incorporated professional clients on a passported basis, but only if the alternative investment fund manager (AIFM) of the alternative investment fund (AIF) is fully regulated as an AIFM by an EU regulator. Note that the third-country passports under AIFMD for non-EEA AIFs and/or non-EEA AIFMs have not been activated yet.

A non-EEA fund manager (such as a U.S. manager) that is not regulated in the EEA as an AIFM typically actively promotes (as opposed to relying on reverse solicitation) its EEA-domiciled AIFs to EEA professional investors in one of three ways:

  1. Registering its AIFs under the national private placement regime (NPPR) of each target EEA country
  2. Appointing an AIFM Platform, which means that an EEA regulated AIFM is appointed by the EEA AIF with the U.S./non-EEA manager ceasing to be the AIFM (which would enable the AIF to be passported throughout the EEA) and either (i) managing the AIF’s assets on a delegated basis or (ii) providing advice to the EEA AIFM, which then makes investment decisions
  3. By forming an EEA-co-owned or subsidiary entity which itself is fully regulated as an EEA AIFM by the EEA regulator of the country in which it is formed (the Subsidiary Model)

If Brexit were to occur without a formal withdrawal agreement or transitional arrangements being put into place by the remaining EEA states in respect of the UK, then UK AIFMS and UK AIFs will lose their passporting rights in respect of the EEA (and of course the reverse would apply). This will impact non-EEA managers using the AIFM Platform and Subsidiary Models where the AIFMs manage EU AIFs that are passported into or out of the UK.

To read the full practice note in Lexis Practice Advisor, follow this link.

Winston Penhall is a partner in Reed Smith’s private funds group based in London. He advises clients on investment management law and regulation with an emphasis on alternative investment funds, their investment managers, and investors. He advises managers on their commercial arrangements and provides ongoing support to investment managers alongside the Reed Smith Regulatory Team. Winston also focuses on advising UK pension schemes and international institutional investors, including sovereign wealth funds, on their managed account and fund investments across the spectrum of investment categories, including insurance wrapped products. In addition, he is a contributing author to a hedge fund practitioner text.

Related Content

For an overview of the Alternative Investment Fund Managers Directive (AIFMD), see


RESEARCH PATH: Private Equity & Investment Management > Fund and Manager Compliance > Practice Notes

For further information on the AIFMD private placement regime, see


RESEARCH PATH: Private Equity & Investment Management > Fund Marketing > Practice Notes

For a discussion of issues faced by new funds in raising capital, see


RESEARCH PATH: Private Equity & Investment Management > Private Fund Formation > Private Equity Fund Formation > Practice Notes