A regular briefing for the alternative asset management industry.
Last month, the UK government promised that, within a year, it will introduce a new investment fund regime that will make it easier for pension funds – and potentially other investors – to access longer-term, illiquid investments. That could be excellent news for alternative asset managers who have been looking hard at ways to widen their investor base. It is also good news for the growing pools of "retail" capital that would like to access the more diversified – and frequently high-performing – funds that have previously been the preserve of institutional investors. Of course, regulators will need to make sure that sufficient safeguards are baked-in to the proposals: it is important, for example, that investors do not have an expectation of short-term liquidity that the manager cannot guarantee – and some high-profile fund failures have put that concern centre-stage. But these and other mis-selling concerns can be dealt with. Indeed, the Investment Association's initial proposal, which seems likely to be the basis for the UK Long-Term Asset Fund, already included a number of important safeguards.
A UK regime will have limited value, of course, for alternative asset managers that want to access retail investors based in the EU. They may be heartened that the European Commission has launched a review of the European Long-Term Investment Fund (ELTIF), a vehicle launched in 2015, but which has not been widely used. The marketing passport offered by the ELTIF is attractive, but only if some of its more restrictive features are relaxed, including strict portfolio composition requirements. Changes to the rules could also come through next year, and the alternatives industry is already feeding into the emerging reform proposals.
But retailisation is already happening in Europe, and managers do not need to wait for these speculative UK and EU rule changes. This week, we published a paper examining the main routes to the retail market that private capital firms are using now, and the opportunities and challenges associated with each. Mindful of the pitfalls, we cautioned that careful planning is required before a firm embarks on a project to widen its investor base, because the regulatory compliance costs can be significant and each of the available vehicles and regimes has costs and benefits.
it is important...that investors do not have an expectation of short-term liquidity that the manager cannot guarantee