Trailblazing a path to the retail masses

The challenge: 

European lawmakers are thinking about letting fund managers authorized under the EU Alternative Investment Fund Managers Directive (AIFMD) have access to retail investors. But policymakers proposed European Long-Term Investment Fund structure to make it happen comes with a few kinks, resulting in limited fanfare when introduced to the industry earlier this year. So what needs to change so that fund managers can actually begin getting excited about ELTIFs? 

Michael Collins’ response: 

It’s important to explain here first why this new fund framework was proposed. From 2008 to 2009 the European Commission was in what you might call crisis management, cleaning up the mess of the financial crisis. Of course that resulted in a lot of new regulation. But about 20 months ago they wanted to start moving in a more positive phase of financial market regulation. So they looked at the success of the UCITS regime, which is for retail investors in liquid funds, and thought a similar product could be made for retail investors wanting to invest in more long-term funds with characteristics such as private equity and real estate funds.

Around 18 months ago they released a green paper discussing the idea of a “European Long-Term Investment Fund” (ELTIF) vehicle that lets fund managers authorized under the Alternative Investment Fund Managers Directive (AIFMD) gain access to both professional and retail investors so long as a few additional safeguards and transparency measures are followed. Although EU member states may allow marketing to retail investors in certain circumstances, currently AIFMD-authorized managers only have access to professional investors.

The ELTIF regime though was met with a lot of criticism. One of the big complaints was that professional and retail investors were required to invest in a one size fits all ELTIF structure – despite having different needs and investment expectations. For example, it is absolutely true that retail investors should be provided with more information to properly assess the risks of investing in a long-term fund. But that comes at a cost that professional investors may not want to see the fund absorb.

The European Parliament has since addressed that concern in a recent report that separates professional and retail investors under the ELTIF regime. This way, GPs marketing to professional investors will not need to comply with the higher requirements for retail investors. For instance, retail funds will have to publish a prospectus that complies with the EU’s disclosure regulation for retail investors, the prospectus directive, and publish a key information document.

But the ELTIF is still too prescriptive in quite a few respects. For example it requires the GP to set out in advance exactly when the fund will invest, exit and return money to investors. That’s a level of detail practically impossible for GPs who manage ten-year funds to provide.

ELTIFs are also somewhat limited in their diversification options. While an ELTIF would be able to invest in a European venture capital fund, it would make perfect sense to also allow diversification into long-term alternative investment funds with similar assets and also to increase the limit on an ELTIF’s diversification more generally.

So we’re in the process of negotiating with the European Parliament, Commission and Council on how this proposal can work. All parties involved want it to be a great success, but there are some issues to resolve. Because of how long we still have to go, I wouldn’t expect the proposals to be finalized by end of year, but maybe sometime in early 2015. I think in the end though we’ll get it right, providing the option for a much wider pool of investors to managers of alternative funds.