Cross-border EU fund vehicles boom
There has been a mixed response from investors to recent European
fund vehicle launches, with investors in many countries retaining a bias towards
buying domestically-domiciled products.
The structure generating the most excitement in the UK is the
Authorised Contractual Scheme (ACS), which brings the UK into line with the tax
advantages offered in Luxembourg and Dublin in so-called tax-transparent funds.
A Northern Trust survey of UK-based finance professionals found
that around half expected the value of UK ACS funds under management to exceed
£250bn by next year, with almost a quarter predicting that as much as £500bn
could be invested by the end of 2017.
A spokesperson for the Investment Association says there is
growing interest in this structure, most notably from the pensions sector as an
alternative to master trust funds and as a pooling vehicle for local government
pension schemes, with the 89 schemes in England and Wales set to merge into six
super funds in the next few years.
As of the end of October, 78 ACS funds had been authorised by
the FCA. There is potential for very large assets levels to be gathered once
the market has adjusted to what the structure offers, suggests Calisan, adding
that apart from tax benefits, the ACS also offers a wide range of transparency
advantages across fund rationalisation, regulatory reporting and distribution.
BNP Paribas Investment Partners head of external distribution UK
Mike Woolley says the vehicle has proved to be more popular with charities and
pension funds than with private investors “for whom the administrative
requirements have posed challenges”.
However, HSBC head of tax product securities services Ed Turner says
this is not indicative of failure in the vehicle’s design.
Uncertainty in the UK fund market as a result of Brexit means
the government’s plan to create an ideal UCITS master-feeder structure has
taken a blow, continues Turner.
“Those asset managers previously looking at the ACS for UCITS
master-feeder structures for cross-border distribution may now be forced to
instead look at similar vehicles in Europe. That said, without the ACS local
government pension scheme and UK life company assets would be flowing offshore.”
In a separate move by the UK, in June the Treasury published a
response to feedback on its July 2015 proposals to amend UK limited partnership
law, with the intention that the changes would be fully operational within a
year. The objective is to promote the UK limited partnership as a market
standard structure for European private funds and maintain and enhance the UK
as a competitive fund domicile.
According to Sascha Calisan, head of fund distribution support
at Northern Trust, this vehicle has the potential to help the UK make up ground
on Ireland and Luxembourg as an international funds base, particularly in the
private market investment space.
“The partnership structure is more recognised in the US than in
the mainstream European financial centres, but there will always be a good use
for the structure, particularly for institutional or more sophisticated
investors,” she says. “With appropriate government support, it will provide a
flexible and transparent alternative to existing vehicles.”
FCP & SICAV
Morningstar data indicates that Europe-domiciled Fonds Commun de
Placement (FCP) had assets of almost €1.8trn at the end of October, while
assets in Sociétés d’Investissement à Capital Variable (SICAVs) were just
under €2.6trn (the two Luxembourg open-ended collective investment structures
only differ materially in terms of the legal entity, which has tax
implications).
However, Woolley suggests that neither have gained significant
traction in the UK partly because of the requirement to report all fund
holdings as though they were direct holdings for tax purposes. Both structures
are platform compliant, but are not available on all platforms.
The head of product management at a major global bank is more
dismissive, suggesting that there is nothing inherent in these structures that
would persuade an investor to abandon their domestic bias.
“This is also the case in other European countries – the removal
of historical barriers does not change buying patterns overnight. Investors in France,
Spain and Germany are even more domestically-biased than those in the UK,” he
says. “The transparency and protections inherent in MiFID will change attitudes,
but it will take time.”
ELTIF & RAIF
Views on the potential of infrastructure-focussed European
Long-term Investment Funds (ELTIF) and Luxembourg’s AIFMD-compliant Reserved
Alternative Investment Fund (RAIF) also diverge.
Pat Lardner, chief executive Irish Funds expects demand for
ELTIF to grow, recognising that it is a specialist product in terms of
investment focus and the term over which investors’ capital will be deployed.
“The policy imperative and positive link to the Capital Markets
Union project are clear and while it is still very early days, we have seen
indications of interest from some managers already investing in the
infrastructure space and also those interested in targeting the mass affluent
market,” he says.
There is interest from the asset management community in
establishing products that can attract investment from ELTIFs in the future,
says Paul Heffernan, HSBC’s head of cross-border sales, Europe, securities
services.
“We expect the ELTIF market to grow steadily, although it may
take some time for investors to fully appreciate the advantages and apply them
in their portfolios,” he says.
Levels of demand will depend on liquidity, how investments are
viewed for capital risk and the treatment for the fund over the long term, says
Calisan, who warns that the various tax treatments in different countries
across the EU may make the fund harder to sell.
Dominic Johnson, chairman of the New City Initiative also says
there is limited interest in ELTIFs as they are hamstrung by a number of
factors and suspects they might be slow to catch on, following the path trodden
by similar European fund initiatives such as EuSEFs (for social enterprises)
and EuVECAs (for venture capital).
“Despite being a retail AIFM, ELTIFs have a high investment
threshold which disenfranchises a number of potential clients,” says Johnson.
“Also, ELTIFs have exposure to infrastructure, real estate and private loans –
these are illiquid assets and require investors to be locked into the
investment for up to seven years, which does not appeal to retail market.”
He says the motivation for creating the vehicle was that it
might be embraced by mid-sized pension funds or insurers lacking the
wherewithal or knowledge to invest in infrastructure. European regulators have
sought to encourage this by easing the Solvency II capital requirements for
insurers with ELTIF exposure.
On the other hand, Luxembourg’s track record of creating
popular, well-regulated fund structures bodes well for RAIFs.
Calisan describes it as an interesting addition to Luxembourg’s range
of fund structures expected to offer greater flexibility and improved time-to-market
over other options, while in the opinion of Heffernan it is further evidence of
Luxembourg’s presence at the forefront of the fund wrapper development curve.
ICAV
Another structure that has met with almost universal approval is
the Irish Collective Asset Management Vehicle or ICAV. More than 290 vehicles
have been launched so far with assets of €25.5bn as of end of September,
positive net flows every month and ICAVs being used both for UCITS and AIFs,
says Lardner.
“The vast majority of these have been in respect of new fund
registrations,” he adds. “We expect the number to continue to grow strongly in
respect of both new funds and increasingly in relation to existing funds
converting from other Irish investment funds structures.”
Calisan observes that ICAV has been termed one of the most significant
developments in the Irish fund industry, with the structure providing flexibility
to investment managers operating funds in Ireland by offering legislative
advantages and potential tax efficiencies.
“The ICAV has become the legal structure of choice in Ireland
for both UCITS and non-UCITS vehicles,” says Heffernan. “The significant
majority of new umbrellas being established are being set up as ICAVs and
platform managers are seeing the most benefit given the changes to accounting
requirements.”
When asked whether Ireland’s collective asset management vehicle
has generated as much business as expected, Johnson notes that it appeals to
managers and investors by effectively checking the box for US taxable investors,
enabling them to be treated as tax-transparent entities.
“There has been a number of high profile fund managers
converting to ICAV structures and the feedback has been positive,” he concludes.
“We expect the ICAV to gain traction going forward.”
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