In its drive towards increasing the presence of investment funds in European capital markets, the European Commission seeks to create new investment opportunities and reduce regulatory costs for funds under its Action Plan for Capital Markets Union (CMU).
New investment products
A number of investment products are being promoted under CMU, including European Venture Capital Funds, European Social Entrepreneurship Funds and European Long-term Investment Funds (ELTIFs), which are types of collective investment funds available under EU legislation. These funding vehicles are policy-driven, and designed to promote investment areas such as venture capital and infrastructure.
Since their adoption in 2013, the European Venture Capital Fund Regulation (EuVECA Regulation) and European Social Entrepreneurship Fund Regulation (EuSEF Regulation) have provided an EU-wide capital raising passport for fund managers authorised to use these labels. Recently introduced legislative proposals relating to the EuVECA Regulation and EuSEF Regulation will expand the availability of EuVECA and EuSEF labels to AIFMD-authorised managers, broaden the qualifying portfolio assets, harmonise regulatory capital requirements, and remove member state imposed administrative hurdles and fees in the establishment of those funds.
ELTIFs are the newest addition, and became available under the ELTIF Regulation in December 2015. The ELTIF Regulation sets out uniform rules on the authorisation, investment policies, and operating conditions of EU alternative investment funds (AIFs) that are marketed as ELTIFs. The intention is to provide asset managers with a broader range of available investments (i.e. infrastructure and long-term assets).
Removing cross-border barriers to investment
Under the Undertakings for Collective Investment in Transferable Securities (UCITS) regime for mutual funds and Alternative Investment Fund Managers Directive (AIFMD) framework for investment managers, the regulatory costs of setting up funds, becoming authorised managers and selling them across borders varies between Member States. Reducing costs for setting funds and cross border marketing would lower barriers to entry and create competition.
The Commission is looking for ways that CMU can lower these costs through greater standardisation and regulatory convergence. This includes gathering evidence on the main barriers to the cross-border distribution – including disproportionate marketing requirements, fees, and the tax environment. The Commission also intends to deliver an effective European fund passport that eliminates cross-border fees and barriers. New proposals are expected in 2016 and 2017.
Loan originating funds
In some cases, investment funds can directly (or indirectly in partnership with banks) provide loans to borrowers; however, this varies across national lines. In some cases, national laws prevent certain funds from investing in loans at all. The Commission estimates that between 2013 and 2015, the volume of direct loan origination by funds increased 43 per cent. Under CMU, this trend may be encouraged by clarifying the treatment of loan-originating funds under the UCITS and AIFMD regimes on an EU-wide basis.
Investment funds under the new Securitisation Regulation
Under a proposed regulation on securitisation (the Securitisation Regulation), due diligence, transparency and risk retention requirements currently imposed on banks and investment firms under the Capital Requirements Regulation and on AIF managers under the AIFMD will be repealed and set out in the new Securitisation Regulation.
For UCITS management companies and internally managed UCITS that are investment companies under the UCITS Directive (collectively, investment fund managers), no due diligence rules will apply in the near term. The Commission may, however, adopt further delegated regulations under the UCITS Directive to bring UCITS within the due diligence rules. Originators, sponsors and original lenders will be under a new positive obligation to retain a 5 per cent net economic interest in securitisation transactions, including those invested in by AIFs and UCITS. It will be the responsibility of investment fund managers to double check that issuers have complied with the various detailed transaction structuring, documentation, risk retention and transparency requirements of the Securitisation Regulation.
This suggests that making investment decisions in respect of securitisations will not be quick or inexpensive. Rather, investment fund managers will need to ensure they have sufficiently documented (and observed) processes in place to ensure that any securitisation they invest in meets all the requirements imposed not only on the investment fund managers, but also the issuer.