Tips for setting up a Dutch feeder fund

A Dutch feeder fund is often used to allow Dutch investors to indirectly invest in a non-Dutch main fund (the master fund). Setting up a Dutch feeder fund with a Dutch registered sub-threshold AIFMD manager is relatively straight forward. There are, however, certain Dutch-specific requirements that should be dealt with upfront, including some local regulatory (AFM) requirements. Furthermore, as of recently, the opening of a bank account in the name of your feeder fund is something that must be planned carefully.

If your main fund manager is registered as a sub-threshold manager without AIFMD license, it is not possible to market your fund in member states other than your home state. Under certain conditions you can rely on the so-called ‘initiative test’ and ‘reverse solicitation’ (whereby Dutch investors – briefly put – solely (i) on their own initiative find your fund and decide to invest or (ii) find your fund when they e.g. visit your home state and subsequently decide to invest in your fund). However, those regimes do not allow for public marketing of your main fund in the Netherlands (or any other member state other than your home state). For that reason, many players decide to set up a Dutch sub-threshold feeder fund whose manager is registered with the Dutch regulator (the AFM) as a sub-threshold manager.

Restrictions

If you intend to set up such a Dutch feeder fund, you should take at least the following into account:

• The manager of your Dutch feeder must be a Dutch legal entity. Alternatively, the fund can be self-managed which is possible if the feeder fund vehicle is a Dutch legal entity. 
• If your feeder fund is a limited partnership, the general partner of the limited partnership can act as manager so long as it is a legal entity.  
• You have to make sure that the persons that – from a material point of view – run the main fund also run the feeder fund. This can be achieved by appointing those persons on the board of the feeder fund manager or in some other suitable manner. Be sure to check tax implications too. 
• It should in any event be clear for the AFM who is materially managing the feeder fund. 
• To calculate the sub-threshold amount of either EUR 100 million (open-end, leverage) or EUR 500 million (closed-end, no leverage), the assets under management of the main fund must be taken into account too. 
• If your Dutch feeder fund relies on the EUR 100,000 sub-threshold AIFMD exemption, the AFM requires a full EUR 100,000 initial draw down.  

Struggle to open a bank account?

A practical and fairly recent factor that should not be taken too lightly when setting up your Dutch feeder is the process of opening a bank account in the name of your Dutch feeder fund in a timely manner. It turns out to be quite challenging these days if you do not take the right measures upfront.

Dutch banks have recently adopted a new KYC approach (“know your customer”) following from a more stringent interpretation of anti-money laundering and counter terrorism financing procedures. This may result in a catch-twenty-two for your Dutch feeder fund. Banks these days only complete their KYC on your fund and open a bank account in the name of the fund once the limited partnership is established. However, your limited partnership fund cannot be legally established if at least a nominal amount is due to be paid up by the nominee limited partners.

To avoid this issue, your subscription document should preferably trigger a clear payment obligation (deferred or not) before a draw down notice is formally serviced and avoid if possible that an investor can still bail out prior to receiving a draw down notice. This way, the limited partnership can in any event be established as soon as the subscription documents are signed by both the general partner and the investors.

The above gets even more interesting if your Dutch feeder fund and its manager rely on the EUR 100,000 AIFMD exemption. Under this exemption, it is strictly speaking not allowed to have an initial nominal amount or setup cost draw down. This means that an ‘establishing investor’ transferring just a nominal amount to set up the fund is currently not an option as the first draw down notice should be for at least EUR 100,000 for any nominee investor.

Even if you serve a full EUR 100,000 draw down notice, under most documentation, investors have to pay up within ten business days. That is a tight window to open a bank account in the name of the fund, plus you will not be able to include the bank account number in the draw down notice until the account has been opened. Alternatively, you may consider reassigning an already opened bank account to an account in the name of the fund. That, however, seems tricky from an assets segregation point of view, when investors transfer funds prior to the name change. The good news is that if you take the right measures upfront, your Dutch feeder fund can be set up in a timely manner with an active bank account in a matter of days following closing.