New securities regulations are beginning to liberalize fund managers’ ability to offer a wider range of products to more investors.
While it’s true that the alternative funds industry continues to see a trend in the regulation of products previously unregulated, the global market is also witnessing moves to liberalize some products, thereby positioning them to invest in a wider range of assets or to be marketed to more investors.
Liberalizing alternative fund rules
In Europe, we’ve seen that two regulated types of alternative investment funds (AIFs) – European venture capital funds (EuVECAs) and European social entrepreneurship funds (EuSEFs) – have not been particularly attractive to either the industry or investors. While a narrow investor base is one reason, a proposal by the European Commission has addressed restrictions that limit access to smaller fund managers.
The EuVECA and EuSEF Regulations allow smaller fund management companies that are below the Alternative Investment Fund Managers Directive (AIFMD) threshold to market funds cross-border within Europe without opting in to the full provisions of the AIFMD. These funds can thus be marketed across Europe to professional investors and to retail investors who invest in any one fund a minimum of 100,000 Euros, and who confirm that they are aware of the risks.
Since the financial crisis and the consequent contraction of bank credit, funds have increasingly filled the space that banks used to occupy and an array of new fund types have been created under the broad umbrella of “alternative credit.” Regulators are starting to take a closer look at these funds, with some acknowledging that there is a need to do more to facilitate the creation of funds that could foster economic growth.
Among them, the Central Bank of Ireland has relaxed rules governing the issuance of loans by AIFs. The rule change announced in December 2016 allows “Qualified” AIFs to invest for the first time in debt and equity securities of companies to which they lend. The funds can hold these securities for hedging, treasury or cash management purposes. Similar movement by regulators is evident in Germany, France, Brazil and India.
With the goal of facilitating rapid and cost-efficient fund launches, Cyprus plans to introduce a regime for registered but non-authorized AIFs. Similar to the Luxembourg Reserved AIF – which has proven popular – the Cyprus Registered AIF will be able to market to professional and well-informed investors and will be managed by a full scope EU alternative investment fund manager (AIFM).
A number of jurisdictions have decided to launch open-ended investment companies, aiming to replicate the success of Continental Europe’s Société d'investissement à Capital Variable (SICAV), or the UK or Irish Open-Ended Investment Company (OEIC).
In Singapore, for example, the regulator has been consulting on a new corporate structure for investment funds called the Singapore Variable Capital Company. It is intended to be a more-efficient fund structure and the hope is that more fund managers will establish there. Similar initiatives are on the horizon in Hong Kong and Mexico.
In Japan, the defined contribution pension law has been revised to respond to new working styles and to make defined-contribution investing more portable. This has led to a huge expansion of the subscriber base to the individual type defined contribution (iDeCo) pension plan product. As a result, more investment management and securities companies have entered the market. Similar proposals are in progress in Italy and Sweden.
It's clear that much is being done to adapt the regulatory environment in ways that will enable fund managers to offer access to a wider range of products. The response to date has been broadly positive among managers and investors operating in those national markets. At the same time, it creates a more complex product landscape for global asset managers to navigate.