European Commission looks to boost fund structures through CMU

European Commission introduces new rules under the CMU to support investment in venture capital and social enterprises.
By Charles Gubert

The European Commission (EC) is introducing amendments – as part of its wide-reaching Capital Markets Union (CMU) – to boost interest in European Venture Capital Funds (EUVECAs) and European Social Entrepreneurship Funds (EUSEFs), two EU fund structures which have struggled notably to take off.

CMU is aimed at unlocking capital from non-bank sources of financing to boost lending in the real economy. EUVECAs and EUSEFs are ideal candidates for such activities. The proposals will enable EUSEFs and EUVECAs to register more easily across member states and prohibit individual countries from levying fees on such fund vehicles. The EU has faced criticism as a number of member states impose additional charges and registration obligations on fund managers such as UCITS and AIFMs looking to distribute cross-border. Scrapping these impediments will make it easier for EUVECAs and EUSEFs to market across the EU.

The proposals will also ease some of the size constraints that have been imposed on EUSEFs and EUVECAs, by allowing larger managers to launch such products. The proposals would also expand the assets which are eligible for EUVECAs to invest in, such as small mid-caps and small to medium sized enterprises (SMEs) listed on SME growth markets. The proposals must be approved by individual member states and the European Parliament before being passed into law.

One expert, speaking at the Association of the Luxembourg Fund Industry (ALFI) conference in January 2016, said that just 34 EUVECAs and six EUSEFs had been launched since the asset classes were unveiled. Others have complained that the registration process is cumbersome, while investor interest has been muted. This is mainly because investors are unable to grasp the benefits of investing into a regulated EUVECA or EUSEF structure as opposed to a non-regulated product. While the fund structures are available to retail and institutional investors, the €100,000 minimum investment threshold is probably too high for the majority of the former.

European Long Term Investment Funds (ELTIFs) are another fund structure scheme which the EU has pushed forward. As with EUVECAs and EUSEFs, interest from investors in ELTIFs – which invest in infrastructure, real estate and loans, has not been high. A number of retail investors do not like the long lock-up periods, while the high investment thresholds are a challenge too. The core target market for ELTIFs has been mid-sized insurers and pension schemes. Again, many of these investors are advised by consultants who tend to recommend capital be invested in blue chip managers.

Nonetheless, ELTIFs have only been around since 2015 and CMU is pushing for eased Solvency II capital requirements for insurance firms investing into the asset class. This could yet spur investor interest in ELTIFs.