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Sustainability has been rising steadily up the to-do list of Europe’s fund industry for several years. But in 2020, as speakers at last month’s ALFI Rentrée conference made clear, ESG has become a priority in market segments ranging from exchange-traded funds to private equity. So what can we expect from sustainable funds?
In recent years, sustainability – a concept often used interchangeably with environmental, social responsibility and governance inputs into investment processes and operations – has been a regular theme of ALFI’s fund industry conferences and other deliberations on the future of the sector.
Like Ernest Hemingway’s line about how a character went bankrupt, its move from the sector’s periphery to its mainstream has come gradually, then suddenly.
It’s not easy to pinpoint exactly when sustainably shifted from a desirable option for ideologically engaged (or conscience-stricken) investors to a critical element in risk-return equations.
But the steady drumbeat of mostly dismal news about global warming has certainly helped.
So has evidence that tolerating mistreatment of employees or misuse of natural resources and habitats, even far down the supply chain, can lead to rapid, devastating and costly reputational damage, fanned by social media
And this year’s collapse of one-time German stock market darling Wirecard is merely the latest, particularly graphic illustration of how corporate governance failings are a red flag often signalling imminent investor losses.
Environmental and broader sustainability requirements for the financial services industry have been flowing through the legislative and regulatory pipeline for some time, especially in Europe. Now they are at hand, from reporting requirements on climate-related risks for investment funds and pension schemes to the EU’s Taxonomy Regulation, centrepiece of the European Commission’s sustainable finance action plan, which took effect in July.
But the shift toward sustainability has been accelerated by the ‘black swan’ of the Covid-19 pandemic. That includes evidence that destruction of natural habitats has heightened our vulnerability to virus-borne diseases, but also the perception that the economic reconstruction offers an opportunity to incorporate environmental and social concerns into long-term planning decisions.
It’s against this backdrop that speakers at last month’s ALFI Rentrée digital conference underlined how far sustainability has seeped into the outlook, strategies and practices of the fund industry, ranging from UCITS retail funds to long-term private equity investments.
One person who needs no convincing is Claude Marx, CEO of the grand duchy’s financial regulator CSSF. He told conference participants: “Luxembourg’s fund industry has nearly €5 trillion in assets. If just 20% is placed in sustainable investments, €1 trillion, that will definitely place us on the map as a centre of the European Green Deal. It would present organisational challenges, but it’s definitely achievable.”
The government also says it’s committed to making Luxembourg a sustainable investment hub.
Finance minister Pierre Gramegna pointed out that in September the state launched the first sustainable – as opposed to green – sovereign bond to be issued by an EU member state or a triple-A rated country. Proceeds from the €1.5 billion bond, which was more than 10 times oversubscribed, will fund spending aligned with the United Nations’ Sustainable Development Goals.
Meanwhile, the Luxembourg Stock Exchange has just unveiled the LGX DataHub, a centralised database for green and sustainable bonds that will structure currently unstructured data and by year-end cover the entire sustainable bond universe.
Luxembourg’s ambitions mesh with the success of the EU in establishing itself as a standard-setter in sustainable finance. Pablo Portugal, director of the Association for Financial Markets in Europe, noted that this is one of the successes of the otherwise unfinished strategy to create an EU Capital Markets Union.
“The EU has become a global regulatory and market leader, for example with the adoption of the Taxonomy Regulation,” he said. “Several member states have led the way with ESG bonds in response to Covid-19.”
At the onset of the pandemic, sustainable investment advocates worried that a desire for returns from any source might become a higher priority – and that governments might abandon green ambitions for fear of complicating economic recovery.
In fact, according to Deloitte partner François-Kim Hugé, “Covid-19 was the first big test of ESG investing, and it proved equal to it: in the first quarter, sustainable funds worldwide saw inflows of $45.7 billion, while the fund industry as a whole saw outflows of $384.7 billion.”
Alain Mandy, chief operating officer for funds at Wellington Management, says demand from institutional clients has accelerated this year for greater clarity on the sustainability of investment portfolios and for screening solutions.
However, he says the industry will be tested by new disclosure requirements due to a lack of consistency in rules among EU countries, differences among sustainability data providers and the idiosyncrasies of investors own preferences.
Industry members had become increasingly concerned about the March 2021 deadline for compliance with the EU’s Sustainable Finance Disclosure Regulation, requiring asset managers to report on their sustainably risks.
The measure has been billed as an important tool to combat greenwashing. At the conference, Luxembourg Stock Exchange deputy CEO Julie Becker urged that the compliance deadline should not be postponed, “even if we accept that the first batch of disclosures will be imperfect”.
But the European Commission has now indicated that while the legislation will still take effect on schedule in March, asset managers will have more time – potentially until 2022 – to comply with the disclosure requirements, in part because Covid-19 considerations have pushed back finalisation of the detailed rules.
Nevertheless, Sean O’Driscoll, Universal-Investment’s country head for Luxembourg, says the trend is inescapable: “No onboarding of new clients takes place without discussions on ESG.”
That’s down in part to increasing confidence among investors that sustainable investment doesn’t entail a penalty in performance; indeed, growing evidence shows that incorporating ESG into strategies can actively enhance returns.
And, says Commerz Real head of impact investing Tobias Huzarski, that doesn’t take into account the broader costs of businesses such as fossil fuel extraction and energy generation borne by society as a whole: “If non-sustainable activities had to internalise their environmental and social costs, their returns would be much lower.”
According to Peter Veldman, head of fund management for EQT Partners, sustainability today is an integral element of the private equity industry’s investment process and operations: “It’s not just about a particular investment, but everything we do. Businesses that resort to greenwashing will be gone before long.”
Karim Khairallah, a portfolio manager at distressed debt specialist Oaktree Capital Management, agrees:”It’s critical to have sustainability in a firm’s DNA. A lot of it is common sense – we were previously 95% there already, but now we have processes in place to manage and monitor compliance, and to identify and fix issues at portfolio companies we acquire.”
Industry members say the speed of the shift toward sustainability is particularly striking.
Jamie Broderick, a former JPMorgan Asset Management managing director and now a board member of the non-profit Impact Investing Institute, argues that the advent of Covid-19 has shifted the focus from exclusively climate change to a broader range of environmental and social issues – for example, how to achieve a ‘just transition’ to a low-carbon world.
Broderick told the ALFI Rentrée audience that sustainability is “unfolding faster than anything I’ve ever seen in asset management. We used to think of sustainability as something philosophical, emotional or ideological, but if you follow the money, the flows of capital show it’s a challenge for managers whatever their personal stance.”
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LuxFLAG, which for 14 years has pioneered the concept of fund labelling to provide investors with transparency about ESG and other sustainability criteria, is about to stage its second Sustainable Investment Week from October 12 to 16. Chairwoman Denise Voss says the Covid-19 pandemic has helped to focus attention on issues such as inequality and exploitative labour practices – and that the need for transparency and education on ESG matters extends beyond investors and the public to the fund industry itself.
Denise Voss: The Luxembourg Finance Labelling Agency is an independent and international non-profit organisation, founded in 2006 to promote the raising of capital for sustainable investment by awarding a recognisable label to eligible investment products.
LuxFLAG labels are recognised for their high standards and a rigorous assessment of the investment product’s investment holdings, strategy and procedures with respect to environment, social and governance matters as well as an affirmation of their transparency to investors – key components of the LuxFLAG eligibility criteria.
As of September 22, 2020, LuxFLAG had awarded labels to 303 investment products domiciled in 10 jurisdictions – Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands and Spain – managed by 98 asset managers in 17 countries and representing approximately €128.2 billion of assets under management.
Sustainable finance has emerged as a major trend in the past couple of years. Through the award of labels to compliant investment products, LuxFLAG has played an important role in enhancing transparency and adding credibility toward investors. These in turn have increased their investment in ESG or sustainable funds, resulting considerable growth in assets of sustainable products, which saw $71 billion of inflows during the second quarter of 2020.
DV: By contrast to traditional bonds, green bonds are intended to finance or re-finance ‘green’ projects such as renewables, energy efficiency, bioenergy and sustainable urban transport, water and waste. Investors have traditionally been cautious about investing in these instruments primarily due to a lack of transparency on the use of proceeds and the very nature of those underlying assets, often leading to the risk of greenwashing.
Part of the challenge has also been a lack of common understanding and standards around what we mean by green investments. Initiatives such as the voluntary guidelines issued by the International Capital Market Association in its Green Bond Principles have promoted best market practice and standards on the use of proceeds, project evaluation, selection, and management of proceeds and reporting.
The GBPs are widely accepted and used by bond issuers, but still on a voluntary basis. Obligatory requirements on adherence to the GBPs or similar initiatives could help prevent greenwashing, but given the early stage of market development and lack of commonly accepted frameworks, one also could consider their gradual implementation.
DV: In my opinion, investors – traditionally institutions but now retail investors as well – and regulators are key drivers of this recent growth, in addition to increased awareness of issues such as climate change among the general public. Covid-19 has also focused investors’ attention on social issues such as inequality, and the challenges for many people to access food, clean water and a living wage.
DV: Labels are voluntary today and are often investor-driven. However, initiatives such as the EU Ecolabel will likely enhance and perhaps help drive the demand for labels. In any case, the EU Action Plan for Sustainable Finance has established a regulatory framework to which the financial industry is adapting. Labelling agencies such as LuxFLAG are also having to adapt to these EU standards.
DV: Agreed, there is a lot of terminology in the sustainable finance sphere, and it can be confusing. It’s very important, for example, to distinguish between ESG investing and impact investment. ESG investing involves taking into account ESG factors as well as financial considerations when deciding which companies to invest in – really looking at the entire picture when it comes to a company and what it could look like in the future.
Impact investing is a subset of ESG investing, but goes even further by choosing companies that are actively seeking to make tangible improvements, for instance in the quality of drinking water for communities. Investors usually expect a profit from such a company, but its impact will be as important or even more so for the impact investor.
LuxFLAG has five labels, of which four are impact labels (Microfinance, Environment, Climate and Green Bond) and one ESG label. The difference between the labels is highlighted in the criteria for each label, available on LuxFLAG’s website.
When it comes to sustainable finance, education is really critical for investors to understand the terminology, for example ESG investment versus impact investing. Education about sustainable finance is also very important within the industry itself, given the topic is relatively new for some asset managers and other financial actors. It’s important that sustainable finance is understood throughout an asset manager’s organisation, given there is an impact not only for portfolio management but for the fund accounting, client service, legal and compliance teams, to name but a few.
DV: Covid-19 is also focusing our attention on the ‘S’ in ESG – social issues. In fact it has lifted the lid on issues that already existed in our society but were not recognised by many of us, for instance widespread inequality and unfair labour practices. I’m hopeful that sustainability priorities will be an important part of “building back better” during and after Covid-19.
Europe is certainly trying to keep it on the front burner: for example the European Green Deal, the programme of the current European Commission which is “striving to be the first climate-neutral continent”. There is a will to make the transition just and inclusive for all, especially since climate change clearly impacts more severely communities that suffer from the greatest inequality.
In addition, the EU Action Plan for Sustainable Finance will continue to require financial players to consider and be transparent about environmental and social issues, for instance through the Sustainable Finance Disclosure Regulation. One requirement will be disclosure of ‘principal adverse impacts’ which means’, for example, firms having to disclose whether and how they take environmental, social and governance factors into account in their investment decision-making process, information that must be available on their website.
DV: Sustainable finance has been top on Luxembourg’s agenda for several years as a result a number of public and private initiatives. To mention just a few, Luxembourg has become the first European country to launch a Sustainability Bond Framework.
There’s also the EIB-Luxembourg platform to support investment in climate finance; the International Climate Finance Accelerator, which supports managers in the creation of financial instruments to finance climate action; LuxFLAG labels to add further transparency and credibility to investment products, and the Luxembourg Green Exchange, which facilitates investor choice through green bond listings.
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The private equity industry has long struggled to overcome a public reputation for maximising profit and jeopardising healthy businesses by loading them with unsupportable debt and charges. In light of the new world we live in, can the sector restore its image by helping to relaunch economies after the Covid-19 pandemic?
Over the past two decades the private equity sector has evolved from a marginal and mostly obscure corner of the investment industry into a core element of the financial system.
Now the Covid-19 pandemic and its aftermath poses unique challenges for private equity firms and their investors living in a world where company valuations are fluid and volatile, creditworthiness is cloudy and governments seem set to play a far more prominent role in economic management than at any time this century.
In terms of financial heft, private equity should be well placed for a leading more in economic recovery. Worldwide, the industry is flush with cash — or at least commitments.
Private equity funds have a record $2.5 trillion available in ‘dry powder,’ money pledged by investors that firms have not yet drawn down.
The environment promises to be welcoming for firms with money to spend, especially those specialising in distressed debt, of which there is plenty expected to emerge over the coming months and years, or those seeking to build industry-leading portfolio companies through bolt-on acquisitions that add scale.
True, the market environment for private equity investment was looking less favourable before the pandemic emerged and lockdowns began. The huge pile of dry powder reflects in part an increasing shortage of suitable investment targets, which had been pushing up prices.
But private equity, along with other types of more complex and longer-term investment, looks more attractive to institutional investors than turbulent public equity markets, cash earning next to nothing in interest and bond markets yoked to the imperatives of central bank monetary easing strategies.
Not to mention the clouds gathering over that staple of institutional investment portfolios, commercial real estate.
However, private equity has its own hurdles to overcome to position itself as a saviour of struggling companies and stuttering economies.
First and foremost? A wretched public image, fuelled by both misunderstanding of what private equity is and does and by the industry’s frequent tone-deafness to wider concerns of society.
Private equity’s opaqueness, complexity and lack of public accountability is often placed in contrast with the (supposed) transparency of companies listed on public markets.
Critics such as Sheila Smith, a former senior economist at the UN Development Programme, describes the sector as “termite capitalism”, targeting a business model characterised by reliance on borrowed money rather than investors’ capital, asset stripping and job destruction, opaque fee structures, unsustainable extraction of returns through dividends funds by further borrowing and use of debt and offshore structures to reduce, often to zero, tax liabilities in the companies in which portfolio companies operate.
In vain do private equity companies protest that their business involves not wanton extraction of assets but the creation of value through the restructuring and re-energising of struggling, directionless companies, the empowering of capable managers and the incentivisation of employees, and that they focus on companies’ long-term development, not just the next quarter’s bottom line.
Because it’s such an emotive phrase, they don’t like to speak of ‘creative destruction.’
But that’s a key driver of the private equity model: stripping away dead-end jobs and businesses and replacing them with new ones that are more productive and have a long-term future.
Some of the criticism is certainly unfair. The obsession with the offshore tax haven structures of private equity (and other alternative investment firms) tends to ignore the key classes of institutional investor that are non-taxpayers, such as university endowments and charitable organisations.
Rather than a pure creature of plutocratic vampire capitalists, the private equity industry is driven principally by the needs of their investors: pension funds to meet their commitments to retirees and insurance companies to meet policy-holder claims.
It’s against this unfavourable reputational backdrop that the private equity sector must face the challenges of the post-pandemic world.
What will it look like?
In the short to medium term, the industry is suffering similar hits to revenue and profit as other businesses. Antoine Drean, founder of private equity placement agency Palico and consultancy Triago, expects profit-sharing – carried interest – on above-benchmark returns to dry up, especially for firms with heavy exposure to the most vulnerable areas of the economy, such as the hospitality, travel and energy sectors.
Hugh MacArthur, Graham Elton and Brenda Rainey of consultancy Bain & Company argue that dealmaking is set for a slump while firms focus on the health of existing portfolio companies and bank lending to the sector is likely to be significantly constrained and subject to significantly tighter conditions (although this is likely to be offset by the sheer volume of dry powder and likely lower valuations of acquisition targets).
They say private lenders, a significant force in the market since the global financial crisis, should also help fill the gap while the need to exit mature portfolio companies in order to provide returns to investors will also spur deal flow.
The Bain & Co. partners also warn that some investors may find themselves financially squeezed if calls on existing capital commitments exceed private equity distributions.
This points to a reduction in fundraising, at least temporarily, after a decade of soaring inflows from investors looking to private equity’s historically higher levels of return to offset the impact of interest rates at rock-bottom or worse.
While the industry’s overall levels of return are likely to take a quick hit from lower valuations on existing investments, especially those made near the peak of the market, the recessionary environment should yield more profitable opportunities.
Can we expect a better reputation for private equity in the months and years after Covid-19? There’s no guarantee that public perceptions will change radically in the near future.
Since the onset of the pandemic, the sector has drawn fire from politicians and others over the insolvency of venerable names of American retailing such as Neiman Marcus and J. Crew, although the critics tend to ignore that the businesses have been deteriorating for years in the face of changing consumer habits and growing internet competition.
However, with near-zero interest rates apparently locked in for years to come, barring an upsurge in inflation that stubbornly refused to materialise despite a decade of loose monetary policy, the core position of private equity in institutional asset portfolios seems more likely to strengthen than to diminish.
In a world where job preservation is now a central economic policy objective, private equity firms will also be under pressure to avoid wholesale layoffs and business closures.
They and their investors likely will have more skin in the game as the peaks of bank leverage of recent years recede and the days of egregious debt-driven dividend recapitalisations are probably mostly over for the foreseeable future. If private equity can claim to be playing a role in saving viable companies and jobs, it may become less of a bogeyman for critics of capitalism.
But it shouldn’t count on being better loved.
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Voici encore quelques mois, alors que les défenseurs du Brexit promettaient à leurs compatriotes qu’ils pourraient avoir le beurre et l’argent du beurre, personne n’aurait pu imaginer que l’on se retrouverait dans la situation actuelle.
Alors que le Gouvernement et le Parlement britanniques tentent toujours – en vain- de s’accorder sur une éventuelle sortie du Royaume-Uni de l’Union européenne et, le cas échéant, sur ses modalités, le Luxembourg doit lui aussi faire face à de nombreuses incertitudes.
En effet, l’avenir du secteur financier luxembourgeois et en particulier les activités liées aux fonds d’investissement pourraient être considérablement secoués par un tel événement. Selon Standard & Poor’s, le Luxembourg est le pays qui, après l’Irlande, devrait ressentir le plus intensément les répercussions du Brexit.
Les magistrales erreurs commises par les dirigeants britanniques qui ont conduit à cette situation ont été amplement commentées. Parmi elles, on peut rappeler la mise en place du referendum de 2016 dans l’espoir des dirigeants britanniques de balayer “une fois pour toutes” l’insurrection eurosceptique qui minait le parti conservateur depuis plus de trois décennies.
Ou encore l’organisation d’élections législatives anticipées en 2017, inutiles, dont les résultats ont finalement fragilisé la majorité en place, ne laissant à aucune des forces politiques en présence les marges de manœuvre suffisantes pour sortir de l’impasse. En résulte, au final, cette stratégie absconse, insaisissable, rendant difficile la négociation et la conclusion d’un accord de sortie de l’Union européenne.
On peut se réjouir, au moins pendant quelques mois encore, que les pires craintes d’un Brexit sans accord ont été balayées (avec le risque de briser purement et simplement des relations financières qui ont été construites pendant plus d’un demi-siècle, d’empêcher les Britanniques de vivre et de travailler au sein de l’Union européenne, ou même de perturber la circulation aérienne entre l’Europe continentale et le Royaume-Uni).
Grâce au pragmatisme dont ont su faire preuve les autorités financières, au Royaume-Uni, au Luxembourg ainsi qu’au niveau de l’Union européenne, les règlements vont, en toute probabilité, rester en l’état actuel, au moins jusqu’à la fin de cette année, et sans doute encore durant 21 mois, voire davantage, quel que soit le dénouement du débat interne britannique.
A priori, le secteur financier luxembourgeois devrait être un bénéficiaire important du Brexit, aux côtés de Dublin, Francfort, Paris et Amsterdam ou encore Madrid.
A priori, le secteur financier luxembourgeois devrait être un bénéficiaire important du Brexit, aux côtés de Dublin, Francfort, Paris et Amsterdam ou encore Madrid Face au risque de ne plus pouvoir accéder au marché unique en cas de Brexit, près de 60 gestionnaires d’actifs, prestataires de services financiers et assureurs spécialisés, ont déjà fait le choix de s’installer au Grand-Duché.
En effet, des acteurs financiers établis au sein de l’Union européenne bénéficient d’un passeport leur permettant de distribuer leurs produits et services dans d’autres États membres sans avoir à obtenir d’autorisations supplémentaires. Si le Royaume-Uni devait sortir de l’UE, les acteurs financiers britanniques perdraient cet avantage, même sous un accord de sortie.
L’arrivée de ces acteurs au Luxembourg a eu pour effet de renforcer la position de la place financière internationale, et plus particulièrement son pôle d’activité lié aux fonds d’investissement. C’est d’ailleurs sans doute heureux que cette tendance n’ait pas– à ce jour– mené à une croissance majeure de l’emploi dans le secteur de la finance luxembourgeois.
A l’approche de la date initiale du Brexit, le 29 mars, le mouvement de migration d’acteurs venus du Royaume-Uni vers le Luxembourg semblait s’accélérer, les institutions financières craignant que la période de transition additionnelle de 21 mois ne se concrétise pas.
Selon la dernière estimation de Luxembourg for Finance, dix entreprises britanniques supplémentaires ont fait le choix de s’installer au Grand-Duché en février, portant leur nombre total à 58, dont 31 gestionnaires d’actifs. En outre, le Luxembourg, comme d’autres juridictions européennes d’ailleurs, va certainement profiter dans les années à venir de retombées liées à des investissements et opérations qui auraient normalement été confiés à Londres.
Selon S&P, le Luxembourg est une des économies les plus exposées aux répercussions ayant trait aux échanges commerciaux et à la migration
Toutefois, toute médaille a son revers. Selon Standard & Poor’s, le Grand-Duché est une des économies les plus exposées aux répercussions relatives aux perturbations des échanges commerciaux et des flux migratoires liés au Brexit, en raison notamment du nombre conséquent de transactions entre les deux places financières ainsi que du niveau d’exportation des biens et services luxembourgeois vers le Royaume-Uni.
Un rapport de la fondation allemande Bertelsmann Stiftung a évalué la perte des revenus auxquels Luxembourg aurait dû faire face cette année, en cas de Brexit sans accord, à 127 millions d’euros. Rapporté à la population du pays, cela représente un montant de 220 euros par habitant. Notons que la perte pour les résidents britanniques serait bien plus conséquente, puisque évaluée à 875 euros par habitant.
Malgré la décision de reporter la date limite du Brexit au 31 octobre, ce risque de préjudice économique demeure pour l’avenir, à moins qu’un accord de sortie ne soit conclu.
De manière générale, au sein de la communauté financière luxembourgeoise et dans les sphères dirigeantes du pays, de nombreuses personnalités considèrent le Brexit comme une perte globale pour le Grand-Duché. En effet, une grande partie des activités liées à l’industrie des fonds d’investissement découle directement des relations que la place financière luxembourgeoise entretient avec la City. Le Brexit risque de rendre ces relations bien plus complexes.
Dans les jours, semaines et mois à venir, Luxembourg pourrait faire face à un véritable séisme politique et économique, sans doute plus conséquent pour ce pays que ce qu’a pu représenter la chute du rideau de fer et de l’Union soviétique..
Les responsables de la place financière craignent notamment l’émergence de nouvelles restrictions et un renforcement du contrôle de l’Union européenne en matière de délégation de l’activité de gestion d’actifs vers des pays non européens, comme pourrait le devenir le Royaume-Uni. C’est un enjeu réel, et ce malgré l’assouplissement récent d’un projet de la Commission européenne qui prévoyait le transfert des pouvoirs des régulateurs nationaux vers l’autorité européenne de supervision des marchés financiers (ESMA).
Au-delà, avec le Brexit, le Luxembourg perd un allié puissant au cœur des délibérations menées au niveau de l’Union européenne. Le Royaume-Uni était un soutien fort du Luxembourg dans la défense du modèle d’ouverture des frontières et de libre-échange économique. Le Luxembourg peut davantage craindre que des barrières protectionnistes s’élèvent à nouveau en Europe, menaçant la croissance de l’industrie financière paneuropéenne. Le renforcement des mouvements populistes et la tendance à un plus grand protectionnisme dans de nombreuses régions du monde n’augurent en effet rien de bon.
Dans ce contexte, le Gouvernement, le Parlement et les régulateurs luxembourgeois ont fait de leur mieux pour protéger le pays et son secteur financier face à un risque de Brexit chaotique. Est-ce que cela sera suffisant ? Difficile à dire pour le moment. Dans les mois à venir, Luxembourg pourrait en effet devoir faire face à un véritable séisme politico-économique, peut-être plus conséquent pour ce pays que ce qu’a pu représenter la chute du mur de Berlin et l’effondrement de l’Union soviétique.
L’environnement économique et politique relativement stable du Luxembourg, qui lui a permis de prospérer considérablement au cours des dernières décennies malgré les crises, risque de disparaître à jamais. Il est désormais l’heure de boucler la ceinture, car nous partons en voyage vers l’inconnu.
Alternative fund managers in Europe and outside appear poised to win greater flexibility on early-stage marketing to professional investors, despite dissatisfaction with the first draft of EU legislation to amend the 2011 Alternative Investment Fund Managers Directive.
In March, the European Commission published a proposed directive amending EU regimes that regulate cross-border distribution of retail and alternative investment funds. The law is a key element of a legislative package advancing the Commission’s Capital Markets Union project, which also includes a prospective regulation intended to facilitate cross-border fund distribution.
At first, the Commission’s proposals to amend the AIFMD alarmed the fund industry, which feared they could make marketing more difficult in several major European markets.
However, following the drafting of a revised version of the legislation by the EU Council, comprised of member states, it now appears that alternative fund managers in Europe and elsewhere will win the greater flexibility they seek in early-stage marketing to professional investors.
The proposed legislation defines and sets rules on ‘pre-marketing’ activity: gauging interest from potential investors before a fund has actually been established while avoiding the full disclosure and administrative rules the directive requires for fully-fledged fund marketing.
This process enables managers to refine their investment offerings and terms, or even abandon projects if they fail to generate market enthusiasm.
What would change
The original AIFMD defines marketing but makes no mention of pre-marketing, leaving it to member states to choose whether or not to authorise it at all. Regulators including Luxembourg’s CSSF and the UK’s Financial Conduct Authority have done so, but other member states treat any initial contact with a prospective investor as marketing.
In its proposals, the Commission was aiming for pre-marketing to be permitted throughout the European Economic Area – the EU plus other counties that follow its single market regime – but under uniform rules.
While the March proposals would liberalise the rules for fund managers in countries where pre-marketing is now barred, they would impose new constraints in other states.
Most notably, they forbid the provision of offering documents or limited partnership agreements, even in draft form, to potential investors. Otherwise, the AIFMD’s full requirements governing marketing would be triggered.
Industry critics protested that the rules would prohibit established practice in the alternative investment industry. This applies especially to funds structured as limited partnerships, often the result of long negotiations between managers and cornerstone investors – whose commitment is essential to the project.
They also noted that the EU’s (now-superseded) Prospectus Directive governing the offering or listing of securities permits the circulation of draft prospectuses to professional investors.
In some cases, critics argued, the proposed directive could force managers to comply with marketing passport conditions even before a final decision to establish a fund had been reached.
Responding to industry complaints
The revised draft issued by the EU Council on June 15 is viewed by analysts as far closer to the more liberal interpretation of the marketing requirements prevalent in the union’s leading asset management and fund service jurisdictions.
The changes would permit alternative investment fund managers (AIFMs) to explore the market of prospective investors, including by circulating draft fund documents until they are finalised before a launch.
Investors would not be able to invest in the prospective fund at this point, and no subscription documents would be available. AIFMs would be required to document details of their market-testing activities and be prepared to supply them to regulators.
Under the Council’s amendments, any subscription to a fund within 18 months of pre-marketing that either referred to the fund, or was established as a result of pre-marketing, would be treated as a product of marketing and subject to notification or authorisation procedures – depending on the AIFM’s volume of assets under management.
That rule would prevent managers from using pre-marketing to obtain reverse solicitation, where participation in the fund takes place at the investor’s initiative and is thus not subject to the directive’s rules on marketing.
The Council draft also would ease a proposed requirement that managers offer to repurchase shares or units from local investors in jurisdictions where they wish to discontinue marketing their funds.
Notably, closed-ended funds are exempted from the repurchase obligation.
While the directive next faces negotiation between the Council and the European Parliament, alternative fund managers are now confident that established practice for dealing with key investors is less likely to be overturned as part of a well-intentioned liberalisation measure.