Blog

For nearly 2 decades, Global Sales Compliance (GSC) has partnered with AIFM/Asset Managers to ensure their compliance with cross-border marketing rules for global fundraising campaigns.

Over this time, we’ve observed the power of Sales Road Maps©: If clients follow our cross-border marketing compliance advice (assuming no exogenous market shocks leading to bad fund performance), there is nearly always a positive correlation between the client’s investment in a sales compliance platform and AIFM/Asset Manager’s business growth through proactive, compliant overseas fundraising. By “business growth” we refer to the increase in the fund manager’s Assets Under Management (“AUMs”) and/or Committed Capital (for General Partners managing Limited Partnerships).

An investment in cross-border marketing compliance PAYS.

How compliance affects AUMs

We have the client case studies to prove the “Power of Sales Road Maps©” for overseas fundraising. They demonstrate growth rates of ca. 300% – 600% increase in AUMs over set time periods.

Strangely, many fund managers in our industry are not convinced about an investment in a sales compliance platform which enables proactive compliant marketing overseas. Time and again, we encounter potential client prospects who ask us for SRMO Sales Road Maps© covering Reverse Solicitation in region EU or in countries with clear marketing rules, such as Japan.

ESMA and NCAs, listen up: There is still a significant number of AIFM/Asset Managers and even third-party distributors in our industry who still believe that Reverse Solicitation is a viable “fund distribution model”. They believe it can be used repeatably as a “sales practice” and represents a total waiver of all fund marketing rules and therefore a regulatory carve-out. They believe no country marketing rules apply to them. Laughable, really, but it’s the truth.

In this post, we explore more practical applications of Reverse Solicitation vs. providing a legal and regulatory analysis.  That is:  does Reverse Solicitation actually grow your business by increasing your AUMs/Committed Capital and therefore your firm’s profitability?

We provide 2 case studies for the sake of brevity (but we have more).  They demonstrate that Reverse Solicitation does NOT grow your business and only increases your potential distribution risk.

What is Reverse Solicitation?

Reverse solicitation is a method used by fund managers to accept investor subscriptions in their fund outside the country’s rules on fund solicitation under the argument that no “proactive fund solicitation” took place. Rather, the potential investor has contacted the fund manager and requested information on their fund on an unsolicited basis.

Regulators (NCAs) have acknowledged that in some limited instances, it is valid that investors contact fund managers and request information about their fund – assuming the fund manager did not contact them first - and that these instances could be considered regulatory carve-outs.

In practice, it is almost a theoretical construct: Reverse solicitation whereby the investor does their own research on your fund/fund manager and contacts you (out of the blue, on their own initiative) requesting information about your fund (naming the fund exactly) rarely happens in practice without initial contact by the fund manager / sales / distributor / cap intro to the client about the fund. Read more in our blog, What is Reverse Solicitation?

Is Reverse Solicitation a Safe Harbour?

No. Even in the cases of legitimate reverse enquiry from a potential investor, if you don’t document evidence that the investor contacted you first, you can still get sued in court by the investor and they can claim you solicited them first in breach of their country’s rules. See our France Case Study, Trifecta of Trouble & Free Put 101: What happens when Investors Sue?

Focusing on Form and not Substance: Some industry players think they are safe by having compliance files full of reverse solicitation letters/emails signed by the investors even though the fund managers have breached the “initiative test” and made outreach to the investor first. They think, “We’ve got the R/S letters to the file, so isn’t that enough to prove we’re exempt from compliance with any country fund marketing rules?”

Focusing only on the R/S documentation to the file (numerous R/S forms, letters, emails signed by investors) while proactively contacting investors first (breaching the “initiative test”) about their funds, expecting to operate under a waiver of local marketing regulations as a safe harbour is a high-risk approach. It subverts the intent of regulators (NCAs) . It’s just illegal marketing in substance. Read more in our blog, Reverse Solicitation: Is it a Safe Harbour?

Is Reverse Solicitation a distribution model?

No, it is not. To ignore country fund marketing regulations under the argument that all your fundraising is done via Reverse Solicitation so the fund marketing rules don’t apply to you is nonsense. All lawyers reading this blog are laughing out loud.

Reverse Solicitation instances as part of your global fundraising efforts should be limited to one-off cases of legitimate enquiries. To say that R/S is a distribution model means you have to wait for the phone to ring or that inbound email request for info on your fund.  If you cannot proactively contact potential investors about your fund, then how can you grow your AUMs/Committed Capital to build your business?

Through telepathy? Crossing your fingers? Mentally willing investors to pick up the phone?

Are regulators cracking down on the practice called “Reverse Solicitation”?

Yes. Our Monaco Case Study, published in AIMA Journal Edition 133, details how regulators are responding. Read Time’s Up for Reverse Solicitation? Case Study Monaco.

Case Studies

Need more convincing? Further case studies show how Reverse Solicitation does NOT grow your business … and how Sales Road Maps© DO.

Case Study #1

GSC Client. Several years ago, GSC prospected a new US client (a hedge fund manager AIFM). Here is how the initial pitch meeting went:

GSC to the CEO, Global Head of Marketing & COO: “So, what is your AIF cross-border distribution model? How do you fundraise for investors in your funds?”

CEO & Head of Business Development: “Our AIF distribution model is Reverse Solicitation in all countries where we are fundraising. We manage an AIF (hedge fund) and a UCITS fund.”

GSC: “It appears you have a 25-year track record of managing your AIF/hedge fund, yet your firm’s total AUMs have stayed static for 20 years, never reaching the $1 billion mark. Are you content to keep AUMs at $900 MM for the coming years or would you like to grow your business significantly?”

CEO/Head of Business Development: “Of course we want to grow our firm’s total AUMs in the interest of profitability.”

GSC: “Reverse Solicitation is not going to get you there and could likely subject your firm to a much higher level of distribution risk. One investor lawsuit could bring down your entire business. Why not ‘flip’ your distribution model to proactive compliant cross-border marketing using Sales Road Maps©? You’ll comply with all jurisdictional requirements. And this will enable proactive marketing so you’re not just waiting for clients to contact you”.

CEO/Head of B-D: “OK. Let’s try this Sales Road Map© approach to see if it works.”

Result: 5 years later total firm AUMs went from $900MM to $6BN AUMs (a 600% increase at peak) for the first time in the firm’s 25-year history. The proof is in the pudding.

Case Study #2

A prospective SRMO Client, a hedge fund AIFM that has been managing hedge fund assets since the late ’90s (25 years). This AIFM is currently managing over $5BN in AUMs, compared to one of its key hedge fund competitors who is managing over $140BN (also for 25 years).

SRMO provided a demo of Sales Road Maps Online Sales Road Maps© to this prospective client, demonstrating how to comply with country specific marketing regulations.

Prospect CCO: “Do you have Reverse Solicitation Sales Road Maps© for region EU?”

SRMO: “No, we do not provide Reverse Solicitation Sales Road Maps© for region EU because it’s too high risk and in ESMA (and NCA) crosshairs at the moment. In addition, there are no approved standardised Reverse Solicitation guidelines across all EU countries. We recommend full compliance with all EU laws under AIFMD and/or NPPR (and MiFID-II) for the marketing of AIFs in region EU.”

SRMO thought bubble:  “How can a firm that has been managing hedge fund assets for 25 years STILL be managing only $5BN in AUMs when its key competitor is managing $140 BN? After 25 years, there’s no excuse to still be managing only $5 BN (unless they don’t want to grow their business)”.

We’re convinced there’s a positive correlation between prospective clients asking for guidance on how to fundraise cross-border via Reverse Solicitation as a fund distribution model and their lack of AUM growth rates, as Case Study #2 demonstrates.

Summary:

An investment in cross-border compliance platform pays dividends of growth in AUMs/Committed Capital. That leads not only  to an increase in firm profitability  but also a decrease in your 5-Key Distribution Risks. Read all about the topic in our post, 5-Key Distribution Risks for Cross-Border Marketing.

We speak to many AIFMs in our industry and have yet to meet  one who says “We use Reverse Solicitation as our fund distribution model” AND who’s also blowing the lights out on asset raise. Their AUMs don’t move or worse, they’re sitting on a powder keg waiting to explode due to distribution risk impact (litigation, sanctions, etc.).

Stop wasting time going up the risk spectrum under Reverse Solicitation. Just comply with all country marketing regulations and crack on with proactive AIF marketing using your Sales Road Maps©.

This is the secret to growing your business through overseas marketing, leading your firm to higher profitability. And we have the case studies to prove it.

Begin exploring SRMO now

www.salesroadmapsonline.com

Sales Road Maps Online®: “Transforming marketing compliance®”