A number of EU sponsored fund structures have come to market in recent years, often met with varying degrees of enthusiasm among investors. UCITS is often seen as the yardstick for success, as its marketability and popularity extends well beyond the EU into APAC, but also Latin America and MENA, mainly off the back of its liquidity and client protections. AIFMD (Alternative Investment Fund Manager Directive) regulated vehicles probably come in second, having been finally accepted by managers after they realised its depositary safeguards and transparency obligations, went down a storm with investors left scarred by the actions of some fund houses during the financial crisis.
Other fund structures – despite being quite intuitive and innovative – simply struggled to muster enough steam. In this bucket is consigned the likes of ELTIFs (European Long-Term Investment Funds), EUVECAs (European Venture Capital Funds) and EUSEFs (European Social Entrepreneurship Funds). The failure – so far – of these products is easy to explain. While providing investors with decent protections, some of the structures are inflexible for managers, although EU regulators are looking to redress this as part of the Capital Markets Union (CMU).
ELTIFs – which are a type of infrastructure fund – are, for example, targeting mass affluent investors and mid-sized pension funds and insurance companies. But this fails to take into account that retail investors prize liquidity, which is the one thing an infrastructure fund with a seven-year life-cycle cannot offer. The argument that ELTIFs will provide an avenue for smaller pension schemes and insurers to get a footing into infrastructure is also flawed. These institutions often delegate portfolio allocations to investment consultants, who probably see little purpose in putting money into ELTIFs when they have a solid understanding of traditional infrastructure.
One fund vehicle that is enjoying solid growth is the Reserved Alternative Investment Fund (RAIF), a Luxembourg structure launched in 2016, in reaction to the Irish Collective Asset Management Vehicle (ICAV). Since inception, around 200 RAIFs have been launched, with a study conducted by Deloitte and the Association of the Luxembourg Fund Industry (ALFI) estimating around 5% of managers in Luxembourg now qualified as RAIFs. This is still a drop in the ocean, given that 62% of managers continue to rely on the tried and tested SIF structure, but the progress of RAIFs is not to be scoffed at.
“RAIFs are regulated fund vehicles as the manager is subject to AIFMD,” said Jean-Pierre Gomez, head of public and regulatory affairs at Societe Generale Securities Services (SGSS), speaking at the ALFI Private Equity and Real Estate (PERE) conference in Luxembourg.
“The chief difference between a fully-compliant AIFM and RAIF is that the latter does not need to obtain authorisation from the CSSF (Commission de Surveillance du Secteur Financier) prior to launching.
“This means the set-up process for a RAIF is very easy enabling managers to get to market quickly as there is no need to wait for CSSF approval. This is why we are seeing more managers launch RAIFs.”
RAIFs are fairly asset class agnostic and have seen interest coming from private equity, real estate, hedge funds, infrastructure, debt acquisition products and loan origination vehicles. Equally, investors need to be accredited with a minimum 125,000 euro subscription threshold putting it out of bounds for retail money. The RAIF is also benefiting from a growing number of managers - who once housed their funds in offshore domiciles like the Cayman Islands, British Virgin Islands (BVI) and Bermuda - consider onshore options such as Luxembourg and Ireland. This re-domiciliation comes as European institutional investor attitudes to offshore jurisdictions have hardened, particularly following the devastating leak of the Paradise Papers earlier in 2017.
The augmentation of the RAIF was also in part driven by onshore concern about the expiration of the National Private Placement Regime (NPPR) in 2018, said Jean-Francois Gillet, head of client services, alternative investment funds at SGSS. AIFMD allows AIFMs running non-EU funds to sell into the EU via NPPR, but such access channels are likely to be cut off. In addition, assessments by the European Securities and Markets Authority (ESMA) on third country AIFMD equivalence and their ability to passport funds post-NPPR’s expiration has been disrupted by Brexit.
Some experts anticipate NPPR could end without equivalence being offered to these markets, which include the US, Hong Kong and Singapore leading to managers in those countries being shut off from distributing in the EU. This could make the EU a less appealing market for fund managers to establish themselves. “The expiration of NPPR could make Luxembourg less competitive relative to offshore centres like the Cayman Islands, where regulatory authorisation is not required pre-launch. There was certainly a nervousness that Luxembourg would lose out to offshore centres, so it created the RAIF,” said Gillet.
The RAIF may also see a mini-boom in activity next year as UK managers look to preserve their distribution footprint inside the EU ahead of Brexit, which is likely to see UK-based AIFMs and UCITS excluded from the Single Market. “There is clearly a trend among UK asset managers relocating into the EU, often via Luxembourg as they want to take advantage of the fund structures available to them. RAIFs – of course – are one of the options these managers will have at their disposal,” commented Gomez.
Despite RAIFs not requiring regulatory authorisation pre-launch, they are still subject to stringent regulation as the manager is caught by AIFMD. Gillet acknowledged AIFMD provisions such as the mandatory appointment of a depositary and reporting requirements applied to RAIFs. “Investors into RAIFs are protected by AIFMD and the depositary. There are already two strong safety nets protecting them, so the need for CSSF authorisation is somewhat negated,” said Gillet.