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The Covid-19 pandemic and persistent economic uncertainty have not dented Luxembourg’s continuing growth as a centre for alternative investments, especially private equity, real estate and private debt, according to speakers at ALFI‘s PE & RE Conference 2020. The capital needs of the economic recovery are likely to give the sector a further boost in the coming months and years, while industry members point to its early commitment to sustainability and reduction of carbon emissions. Meanwhile the range of activities carried out in Luxembourg is growing in response to substance requirements – but also the jurisdiction’s deep pool of fund services expertise. Here’s a report we put together as media partners for ALFI‘s event.
The economic and social disruption stemming from the Covid-19 pandemic has done little to slow the growth of Luxembourg as a hub for international alternative investment business, according to speakers at ALFI’s – virtual – annual PE & RE Conference on December 1 and 2.
The 500 registered attendees heard ALFI chairperson Corinne Lamesch underline the importance of private equity and real estate to the grand duchy’s financial sector and to the fund industry as a whole in an environment that has if anything boosted demand for private assets. She cited a forecast by specialist data provider Preqin that global alternative fund assets are forecast to reach $14 trillion by 2025, with private equity accounting for $4.9trn, private debt for $1.4trn and real estate for $1.2trn.
“Regulated alternative funds in Luxembourg reached €800bn at the end of September, 17% of total fund assets – but this does not include the asset volume in unregulated funds, for which statistics are difficult to compile,” Lamesch said. A measure of the sector’s impact is the 1,160 reserved alternative investment funds launched since the regime was introduced in 2016, along with 4,320 special limited partnerships, a structure added to the Luxembourg fund toolbox in 2013.
She added: “The pandemic has impacted fundraising and short-term performance, but players are confident, if not bullish, about the long term, especially by comparison with other investment strategies – especially with initiatives underway to open alternative investments to a wider investor base.”
The industry must live with economic headwinds for a few months yet, thanks to the second wave of infection in Europe and the US, according to Nick Brooks, chief economist of London-based private debt, credit and equity manager Intermediate Capital Group. But he said: “We should be moving in the direction of normalcy by the second quarter of 2021 and see a recovery powered by pent-up demand in the second half of the year.”
Brooks argues that private capital has a key role to play in the economic rebound, with a great deal of dry powder available for investment, just as governments are obliged to start cutting back measures to support jobs and businesses at a massive cost as a proportion of GDP. “Many companies have only survived through government-backed loans and direct funding, and there will be great demand for capital later this year,” he said.
The fast-growing private debt market stands to be a prime beneficiary, says Alfonso Erhardt, founding partner of Madrid-based Oquendo Capital. “There has been a huge correction and many business models have been impacted, with sectors such as tourism and airlines particularly suffering.” Not many borrowers have sought renegotiation of terms, he says, but there have been more requests for additional liquidity, and Oquendo has urged firms to take as much state assistance as possible.
Giorgio Medda, group co-CEO at Italy’s Azimut Private Debt, says sustainability issues are increasingly central to the industry. “We benefit from the luxury of being able to cherry-pick business, but private markets are more efficient in implementing ESG considerations,” he said. “We provide a high degree of support to the economy, working with borrowers on sustainable business plans, which comes very naturally to ESG investors.”
Director Sara Huda says the collection and use of data is an increasingly important issue for Carlyle, which now has 40 staff in Luxembourg and over the past five years has seen SPV numbers in the grand duchy grow from 80 to 400 and assets from €5 billion to €20 billion. “We have consolidated data from our portfolio companies in a centralised function, which means Luxembourg is now plugged into the data flow. It is no longer a pure back office; data is not just being collected but interpreted here.”
Her appreciation of the advantages of the jurisdiction is echoed by Thomas Healy, chief operating officer of Swiss asset manager Kieger, which has been managing Luxembourg-domiciled funds since 2009: “Its proximity, language and culture make it ideal to target a continental European investor base. Luxembourg has a strong reputation and robust regulation, but also flexibility and the presence of global service providers. At Kieger, we also take governance and risk management very seriously.”
He also praises the CSSF and service providers for their responsiveness when the firm was merging a group of FCPs with UCITS earlier this year and moving a range of 20 funds to a new depositary and administrator: “We expected delay with these complex processes, but in fact hit all the deadlines.”
Martin Bresson, director of public affairs for industry group Invest Europe, admitted that the public perception of private equity remains “clouded”, pointing to the role of private equity in job creation and arguing: “We are a cornerstone of the European economy, not just a fringe adjunct.” He also complained about “the false dichotomy presented between finance and the real economy, as though they were not connected”.
A new development in Luxembourg is the establishment of pledge funds, a concept developed in the United States where rather than committing capital to a commingled pool invested at the discretion of the general partner, investors have the right to review each investment before deciding to participate.
“It gives investors the ability to steer portfolio construction in a more coherent way,” said Eugene Zhuchenko, founder of ETORE Advisory, which was involved in the establishment of the first pledge fund structure in the grand duchy. “Sometimes a blind pool fund is not what investors expect. There is a risk of strategy drift, and of opportunistic investments to boost returns that could involve higher risk.”
For managers, says Arjun Infrastructure Partners’ Serkan Bahçeci, pledge funds offer the opportunity to work more closely with investors and gauge their deal appetite, although he acknowledges that it requires they have the resources and time to assess each proposed investment. And Allen & Overy partner Jean-Christian Six notes that it demands the ability to track the exposure of each investor to their particular underlying assets.
Pledge funds promise to become a new addition to Luxembourg’s alternative fund toolbox, which already offers a wide range of options, says Clifford Chance Luxembourg partner Paul Van den Abeele. He notes that whereas historically the jurisdiction was the domicile principally of main fund vehicles, today managers are also using it for securitisation, co-investment, carried interest and sidecar discretionary co-investment vehicles.
US-based global real estate manager Hines has appreciated the options offered by the grand duchy for more than a decade, says tax director for Europe Paul Taylor, noting that the $144 billion group has as many as 30 regulated and unregulated structures and around 150 special-purpose vehicles in Luxembourg. He said: “We have been focused on Luxembourg for a long time because of its flexibility and the quick time to market for unregulated vehicles.”
Next March, the Luxembourg fund industry faces the start of reporting under the EU’s Sustainable Finance Disclosure Regulation. Said Linklaters partner Hermann Beythan: “It is a game-changer that goes to the heart of private equity and real estate – what funds invest in and why. Managers will have to examine not just the impact on their processes but the value of their investments, such as buildings located on a shoreline.”
Fidelity International’s head of EU public policy, Natalie Westerbarkey, says the real estate sector has a wide range of avenues for making its assets more sustainable, including renovation and retrofitting of buildings, tenant engagement and involvement in international industry initiatives. “There is a lot of awareness of environmental and social issues in Europe, but there is scope for improvement elsewhere in the world, especially in Asia,” she said.
Industry members are also preoccupied by the ongoing European Commission review of the Alternative Investment Fund Managers Directive. Arendt & Medernach partner Claude Niedner argues that the push by the European Securities and Markets Authority for closer regulation of portfolio management delegation to non-EU jurisdictions should not put at risk the global competitiveness of the AIFMD regime: “Do we want to keep an open architecture model, or European funds with European managers for European investors and European assets? We should not try to fix what isn’t broken.”
At the same time, they are sifting the issues thrown up by the Covid-19 pandemic and the successive economic lockdowns. Jeff Rupp, director of public affairs for industry body INREV, says the pandemic has accelerated existing trends, such as the increasing importance of the logistics sector and rising investor interest in debt funds. But he warned there may be further consequences to come as ‘normality’ returns: “With a surge in public borrowing and pressure on EU countries to raise more revenue, real estate may represent an easy target.”
Sven Olaf Eggers, CEO of Stuttgart-based real asset fund manager AIF, says this year has brought home that digitalisation is not a panacea in itself, but a means to an end. “We need not just data but correct data, and interfaces for the interaction of portfolio and risk management. The fact that high street retailers with apparent sound business models and ratings are going bankrupt demonstrates the need for smarter data.”
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Sustainability is fast-becoming a key focus in asset management. Last week’s ALFI London Conference was full of great online discussions and fascinating insight from speakers on key related topics, from Brexit to fund regulation to fiscal and monetary policy to the impact of Covid-19. Here’s a report we put together as media partners for ALFI‘s event. Take a look at their site to see if you’d be interested in any of their upcoming virtual conferences.
With negotiations on a future trade deal between the European Union and the UK government seemingly on tenterhooks, Brexit cast an understandable shadow over ALFI’s annual London Conference on November 23, a virtual event that attracted around 1,000 registrations. Speakers such as ALFI chairperson Corinne Lamesch emphasised, however, that the close relationship with Luxembourg’s asset management sector is destined to endure: “We will continue to work together with UK fund sector whatever the outcome of the trade talks.”
The Covid-19 pandemic may have shaken up working patterns, changed the economic environment significantly and influenced investment strategy trends, but so far it has not dented the sector’s positive outlook. Lamesch noted: “Luxembourg’s fund industry has demonstrated its agility and resilience – after an 11% drop in March, assets have rebounded to close to their January record high.”
Finance minister Pierre Gramegna says Luxembourg has a more interdependent relationship with the UK than other European countries. “Brexit is not on the minds of many EU policymakers, but I am an exception,” he said, noting that Luxembourg has been well placed to help UK financial businesses adapt to the new legal environment: “We have had four years to prepare for the end of passporting and the need for UK institutions to create an EU presence. And we see a trend toward use of Luxembourg law for bonds because it is close to English common law and offers both flexibility and legal certainty.”
While industry members believe an agreement that will minimise disruption for the financial industry should be possible, they warn that deadlock could lead to a damaging loss of trust. Said Luxembourg for Finance CEO Nicolas Mackel: “The election of Joe Biden is a game-changer tipping the balance toward a Brexit deal, reducing the risk of the UK slamming the door, but the time left for implementation is getting short”.
“A Brexit deal is important to the financial services industry because it will change the atmosphere between Britain and the EU. Without a deal, acrimony could last for a couple of years, and it would be more difficult to rebuild bridges.” Mackel was echoed by Schroders’ head of public policy Sheila Nicholl: “We need trust and co-operation, and without a Brexit deal that will take time to rebuild.”
Chris Cummings, CEO of the UK’s Investment Association, added: “We need a permanent structured dialogue with the EU to share ideas, compare notes, and ensure no unwelcome surprises.” But head of European compliance Christopher Dearie says private equity firm Apollo Management is worried about national differences within the EU that could undermine single market opportunities even for firms which, like Apollo, have established substantial operations in EU jurisdictions to prepare for Brexit.
In the meantime, regulators are adapting to the separation of the UK from the EU single market rulebook. Nick Miller, head of asset management supervision at the UK’s Financial Conduct Authority, says the regulator is drawing up an Overseas Funds Regime as the long-term successor to the FCA’s temporary permissions regime to prevent short-term market disruption.
“Our aim is to maintain high standards but to be open to partners in the EU and elsewhere to offer retail funds in the UK,” Miller said. “The onshoring of EU rules will stop because we need to ensure our regulation is appropriate for the UK market. We will develop a UK green taxonomy, which may not be exactly the same as the EU’s, but will target similar outcomes.”
CSSF head of funds supervision Marco Zwick, meanwhile, is focusing on the implementation on March 10 next year of the EU’s Sustainable Finance Disclosure Regulation. “The SFDR will be a big challenge for the sector and for regulators, and everyone will have to move fast. We are defining a fast-track process for prospectus updates, because the EU rules give no leeway on the deadline.”
SFDR compliance is just one aspect of the challenge facing the asset management industry in incorporating sustainability into its strategies and operations. “We need to show clients we care about sustainability and to translate that into investment decisions,” said Aviva Investors’ global head of product strategy Steven Blackie.
“There has been a tectonic shift toward ESG, which now underpins every investment strategy in a way not seen two years ago, and we’re only scratching the surface.” This could affect the industry in less obvious ways: “As investors demand environmental and social outcomes, this could tip the balance back from passive toward active management.”
Fidelity International CEO Anne Richards points to the problem of a lack of consensus on sustainability standards and definitions. “I’m less worried about greenwashing than about confusion over what constitutes green investment,” she said. “Managers are having to figure out what’s right – for example, some advocate engagement with fossil fuel companies to effect change, while others simply exclude them. We need comparable and consistent criteria and measurable characteristics. At present there are so many different taxonomies – what we need is something that looks like accounting standards.”
Schroders’ head of Europe Karine Szenberg is confident, however, that the trend is unstoppable, and it implies a new role for asset managers. “Sustainability and stewardship are completely interconnected,” she said. “Initially the focus was on governance, but environmental and social impact are now equally important. Today unsustainable businesses and sectors have nowhere to hide.”
That’s reflected in the surge in demand for sustainable products from investors; a recent PwC study forecast that ESG considerations could drive up as much as 50% of all European fund assets by 2025. James Broderick, a board member of the London-based Impact Investing Institute said: “Growth of 30% a year should be an opportunity, although for asset managers that are not ready it represents a threat.”
The shift toward sustainable investment may have been slowed by a narrower definition of fiduciary duty in the UK and US, which excludes non-financial considerations, than in other European countries. But European Investment Bank senior adviser Nancy Saich believes this may be about to change – especially with the change of administration in Washington. “A World Economic Forum report at the beginning of this year found that the biggest global economic risks were all related to the environmental and climate,” she said. “Not to embrace sustainability means ignoring major risks.”
Fund service providers face other changes to the business environment. “Both we and our clients are under pressure on costs, regulation and disruption around data technology,” said BNP Paribas Securities Services managing director Robert van Kerkhoff. According to senior vice-president Eduardo Gramuglia, the pandemic has accelerated strategic changes at State Street Bank International to adapt to new cost imperatives and the evolution of asset classes and products.
Asset managers, meanwhile, must take into account increasingly differentiated customer needs. Micaela Forelli, head of European distribution at M&G International Investments, says demand can no longer be served by a single fund or range but an ad hoc and niche approach. Amundi business development manager Etienne Lombard added: “Ultra-high net worth individuals with whom you have to listen to their needs – it’s no longer prêt-a-porter but haute couture.”
Independent consultant Peter Grimmett says that in some areas, policymakers need to do a better job. “The industry was very supportive of the European Long Term Investment Fund regime, but what came out was slightly different,” he said. “ELTIFs were to offer regulation and access to retail clients, but the retail rules were tough – so it was easier for asset managers to launch AIFs instead. The basic Pan-European Personal Pension product came with a 1% maximum charge including advice fees, which was very difficult for active asset managers. Changes are needed to make these regimes fit for purpose.”
These developments are taking place just as economic policy fundamentals are undergoing their biggest change in three decades, according to Citi chief economist Arnaud Marès. “The 30-year separation of monetary and fiscal policy is probably over,” he told conference participants. “Economies will continue to need huge government support until a Covid-19 vaccine is rolled out.”
Meanwhile, monetary policy is no longer working as it’s supposed to, he says; even with interest rates at zero, or negative rates, people are convinced they need to save rather than spend. “In addition, governments that have borrowed hundreds of billions of euros need to know that central bank support will not be suddenly taken away. In this new world, central banks have no choice but to ensure interest rates and yields will remain close to zero for a very long time.”
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From sustainability to cross-border pensions and data governance, last week’s Digi Pulse Switzerland virtual event covered key issues for the asset management industry. Here’s a recap we put together as media partners for ALFI‘s event. Take a look at their site to see if you’d be interested in any of their upcoming virtual conferences.
Amid an environment of economic, financial, political and medical uncertainty unprecedented in the modern era, Swiss asset managers targeting European or global investors continue to rely on Luxembourg as an investment fund hub attuned to their needs and constantly evolving to meet the requirements of the international marketplace, according to speakers at the ALFI Digi Pulse Switzerland on November 18.
Event chairman Daniel Siepmann, CEO of Credit Suisse Fund Services (Luxembourg), told participants in the annual industry gathering from two of Europe’s (and the world’s) most important international financial centres – transformed from a face-to-face roadshow to an online meeting reflecting the constraints of the Covid-19 pandemic – that Swiss asset managers already account for 14% of Luxembourg’s fund assets, a total of € 630 bn in 2,745 funds run by 157 managers.
Siepman says the grand duchy’s appeal to the Swiss investment industry lies in its wide product palette, including both unregulated and highly regulated vehicles. They encompass recent additions such as reserved alternative investment funds (RAIFs), which offer managers exceptional flexibility and rapid time to market, as well as special limited partnerships, designed to offer the same legal characteristics as US and UK partnership structures, and of which more than 4,000 have been established since 2017.
Members of ALFI’s strategic advisory board say the organisation has no intention of resting on its laurels and is pressing ahead with ambitious goals for the next five years. Steven Libby, EMEA asset and wealth management leader at PwC Luxembourg, says the need for longterm European cross-border savings and pensions solutions has been underlined by the pandemic. The time may finally have come for the Pan-European Personal Pension, a voluntary complementary pension product offering an alternative to national retirement savings schemes.
LuxFLAG chairwoman Denise Voss says the Build Back Better concept for recovery from the pandemic offers an enhanced opportunity for Europe’s asset management industry to demonstrate its value not only by expanding the scope of sustainable products but boosting education on sustainable finance and investing for members of the sector as well as the public. “The next generation will expect ESG products to be the default,” she said, “and so will future potential recruits to the asset management industry.”
Capital Group’s Jean-Marc Goy says UCITS have been recognised globally as a label of strong investor protection for more than three decades, becoming one of the biggest success stories of the EU single market for financial services. Meanwhile, the Alternative Investment Fund Managers Directive has paved the way for Luxembourg to become a global private equity hub, noted EY’s private equity fund leader for EMEA and India, Alain Kinsch, “thanks to its constantly enhanced toolbox, and as a cost-effective place to do business thanks to a deep ecosystem, talent and best practice across the value chain”.
The European Securities and Markets Authority is pushing for the convergence of rules governing UCITS and alternative investment funds, a process that is already underway, says Ilias Georgopoulos, CEO of Credit Suisse’s MultiConcept Fund Management. However, he cautions against ESMA’s call for tighter rules on cross-border delegation of asset management functions – ostensibly because of Brexit, but a shift that would also affect groups in Switzerland and the United States. “Luxembourg has 30 years of delegation experience,” Georgopoulos said. “Don’t change things that work.”
GAM’s head of continental Europe Martin Jufer highlights the broader role of asset managers in society. “The growth of responsible investment reflects investor demand and represents an opportunity for asset managers to embrace a stewardship role on their behalf,” he said. “But it requires a huge commitment starting with boards, people and processes to make sustainability an integral part of strategy, including governance issues such as engagement with companies and proxy voting.”
Head of products Michael Kehl says UBS Asset Management is moving ESG integration into everything it does and all its products: “It is embedded in almost every active investment decision.” Arguing that the challenge of the EU’s Sustainable Finance Action Plan is to find the right balance between establishing common standards and encouraging innovation, Kehl says Switzerland is likely to follow the EU blueprint closely, especially given the growing political strength of the country’s Green Party.
Luxembourg’s financial regulator is playing an important role, says Arendt & Medernach partner Henning Schwabe. He said: “The CSSF is helping the industry prepare for application of the EU’s Sustainable Finance Disclosure Regulation on March 10 next year, putting in place a fast-track procedure to get prospectuses updated in time.” He also cites the regulator’s measures to ease strain on asset managers during the pandemic, including use of swing pricing, authorisation of digital signatures and flexible over reporting deadlines.
The CSSF is also stepping up its requirements for effective anti-money laundering controls, notes Elvinger Hoss Prussen partner Gast Juncker. “Following money laundering scandals, it is demanding that AML risks are addressed not only at distribution level but in terms of assets, counterparties and delegates, and non-compliance will be met with stronger enforcement,” he said.
The intertwining of sustainable investment and post-pandemic economic recovery should give further impetus to Luxembourg’s role as a centre for private equity and infrastructure investment, says EY senior audit manager Stefan Rech. “Renewable energy is a key focus, with compound growth of installed capacity averaging 8.5% annually since 2010,” he said. As coal consumption declines and transmission and storage technology improves, renewables’ share of global power generation is forecast to increase from 15% to 25% over the next 10 to 15 years.
Partners Group’s head of infrastructure business development Robert-Jan Bakker says that together with electricity generation, transport and the built environment offer pathways to tackle 75% of carbon emissions. “For the remaining 25%, we are looking at carbon capture and storage, particular in the US, which has clusters of big emitters, regulatory pressure and natural underground storage capacity,” he said.
Northern Trust EMEA product manager Stuart Lawson argues that recent experience has demonstrated the critical importance of ensuring investors understand the liquidity characteristics of such investments. “The challenge is to ensure that the structure of a fund is aligned with investor expectations and the nature of the assets,” he said. “For instance, renewable energy offers steady and progressively increasing income, but it is very illiquid.”
This comes back to transparency, but also governance, Lawson says – and the critical importance of data. He said: “People active in governance need to be qualified, and based in the location where the fund is regulated; decisions need to be properly documented, and checks and balances incorporated into the investment process. Operating models must be redesigned and re-engineered around data and data strategy; reporting must be reliable, comparable across the industry and consistent with its standards.”
As the global economy gradually emerges from the slump precipitated by Covid-19, ALFI Digi Pulse Switzerland participants agree that the symbiosis of the country’s asset management industry with Luxembourg’s fund structuring, servicing and distribution capabilities will be more important than ever.
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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.
A lire: LËTZEBUERGER JOURNAL – Petite mise au point
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.