Magazine Issues » October 2013

ASSOCIATION COLUMN: Overly bureaucratic

Thomas-RichterThe EU Commission recently published its proposal for European long-term investment funds (ELTIFs), which are intended to form a source of capital for infrastructure projects.

Commissioner Michel Barnier is keen to move quickly. Apparently, he wants to introduce ELTIFs in this legislative period, meaning that the regulation would need to be approved by the parliament and the council of the European Union by spring next year.

However, after a detailed examination of the proposal, a question mark should be placed over the likelihood of the ELTIF’s success.

European long-term investment funds are designed as closed-ended funds and shall be prohibited from repurchasing or redeeming shares until maturity.

This restriction on the ability of investors to access the invested capital might damp the investors’ demand. The intention is to remove this obstacle by allowing the fund units to be traded on the secondary market.

However, secondary market buyers would expect a substantial discount on ELTIF share price.

Potential new issue buyers know that. The fact that they will be unable to resell their unit without offering significant concessions on price will limit their enthusiasm. This shows that the commission does not tailor the product to the needs of private investors.

There are no tax incentives. Offering tax incentives would help to counter the liquidity problem of European long-term investment funds. The commission knows that, too, but is not responsible for tax matters.

Tax law is the preserve of the member states. In Germany, it is highly unlikely that legislators will be prepared to assign fiscal incentives to investment products of this kind.

The idea is that European long-term investment funds shall invest, above all, in tangible assets with a volume of at least €10 million. According to the current proposal, direct investments in property will also be admissible.

Investment portfolios shall be diversified, with no single financial instrument accounting for more than 10% of the fund’s total capital.

Individual investments may account for up to 20% of the investment fund’s total assets provided the sum of such investments does not exceed 40% of the total capital. This will make the task of ELTIFs structuring very challenging, with various large-scale investments having to be squeezed into a single product. An ELTIF issued in 2015, and maturing in 2030, would require at least eight different investment objects with almost identical terms.

Enhanced standards of investor protection would require a sales prospectus to be published – including for sales to professional investors – with particularly strict rules on the disclosure of costs.

With regard to retail sales, a key information document will have to be made available to investors. Furthermore, European long-term investment funds will be expected to set up a paying and delivery agent in each member state in which fund units are distributed.

According to the proposals, ELTIFs will be classified as alternative investment funds (AIFs), as defined by the Alternative Investment Fund Managers Directive (AIFMD). They can only be administered by licensed AIFMs. Each ELTIF will require a specific product licence.

In addition to the AIFM licence, each management company will need further authorisation to act as an ELTIF manager. Taking into account the marketing notification under AIFMD, this means effectively that  four licences are required in order to issue a European long-term investment fund.

All in all, the product is overly bureaucratic. If the commission wants to attract capital for infrastructure, it needs to meet investors and fund managers half way and create an attractive framework for the product.

Unfortunately, it seems unable to put aside its regulatory zeal even when the attainment of its own policy objectives is at stake. It is a pity, because the idea as such is promising. To make the product attractive to private investors, it would be better to link infrastructure financing to pensions.

In doing so, it would be essential to offer tax incentives. It is probably for this reason that the commission has opted for a more modest solution. Hopefully it does not squander the opportunity.

Thomas Richter is chief executive officer at the German Investment Fund Association (BVI)

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