A regular briefing for the alternative asset management industry.
As we wrote earlier this year, there is growing demand for alternative investments from individual investors – and many private fund sponsors are keen to oblige. A range of private equity, credit and infrastructure strategies are expected to come to market between now and the end of Q1 2023. The largest, typically global, alternative asset managers are leading the charge. European lawmakers are keen to help.
But targeting the retail market does mean real change for the fund manager because – even though the underlying investments are the same – the products, distribution channels and compliance requirements are very different.
Unlike their institutional-focused equivalents, most private funds aimed at the retail market are evergreen, fully drawn and semi-liquid, typically offering monthly subscriptions and quarterly redemptions.
The distribution model is also new for many firms: initially, managers often grant exclusivity to one or two wealth management firms or private banks, but then subsequently distribute them more widely, usually through other discretionary wealth managers.
And retail clients multiply the compliance burdens, chances of regulatory enforcement, and reputational risks.
All in all, it's a strategic decision that should not be taken lightly.
Navigating the European regulatory hurdles to wider distribution remains challenging, especially as the EU generally treats sophisticated investors as "retail". There are Luxembourg structures that work, and a number have been successfully launched, but the industry has been pressing lawmakers for a better, more bespoke, structure.
In October, they obliged: the European Council and Parliament announced political agreement on reforms to the EU's ELTIF – the European Long Term Investment Fund. The agreed changes have been warmly welcomed by the market, including industry associations AIMA and Invest Europe, who have worked hard to get policymakers to this point.
Unlike many of the existing retail funds in the market, the ELTIF, even after these reforms, cannot be an evergreen structure and must have a fixed term. That will limit its attractiveness for some and means that the current structures will not disappear any time soon. But other features of the ELTIF are appealing – in particular, its full retail passport and (after the forthcoming changes) no minimum subscription. The reforms will also facilitate ELTIF funds of funds (so long as underlying funds are EU), master-feeder structures (if the master fund is also an ELTIF), real estate and fintech focused funds, and prudent borrowing. Some limited early redemptions will be possible, and the revised text should clarify some specific rules on conflicts of interest that have been inhibiting adoption.
The ELTIF reform process is not quite over: technical details are still to be agreed and some issues still need to be ironed out. The implementation timetable is unclear, but provisions are expected to allow the new rules to be adopted early by both existing and new funds.
Meanwhile, policymakers in the UK remain keen to facilitate wider uptake of the UK's new structure, the Long-Term Asset Fund (LTAF). So far, there has been limited appetite for the vehicle, that was initially envisaged as a way to encourage more defined contribution (DC) pension schemes to invest in private equity and infrastructure.
The UK-centric LTAF may take longer to get traction in the market … Alternatives managers are currently focussed on the bigger opportunity for pan-European products