More than 10 years after the entry into force of the AIFM Directive, it is now widely accepted that the market has become mature enough to attract retail investors into alternative strategies such as PE/RE or Debt and we have seen major players in the market develop pan-European products dedicated to a retail client base.
During this 15min webinar, organised by CMS Luxembourg the speakers address topics such as the (delayed) rise of ELTIFs as well as other products/solutions available in Luxembourg to attract retail investor capital throughout the European Economic Area.
Watch the recording here:
Please feel free to contact our experts, should you have any questions.
Transcription:
Aurélien Hollard:
We will dig into that fascinating topic of raising funds from retail investors. Within the fund industry, there is a mismatch between retail and alternative investment strategies. There exist, of course, solutions for retail investors. In particular usage funds, but such funds are designed to enable investments in distant securities, excluding, therefore, most, if not all, alternative assets.
One can also rely on prospective regulation, for instance, via securitization scheme. A number of restrictions are limiting or even prohibiting the use of such a solution when it comes to alternative investment strategies. The current framework does not entirely respond to the growing trend of a pure retailisation of alternative investment funds. As there is either, as we saw, an investor's eligibility issue at product level, whether it's a C for right, not open to pure retail investors. In this case you may want to go for a Part II fund, for instance, to address that topic. Or you have an asset class eligibility issue, as we saw it for usage funds, which do not allow investment into alternative assets. We have tested a legal design approach to facilitate the understanding and allowing you to get an easy overview of the situation.
We will play with little cars today. Before Harrison navigates you between the various options, a few points of context before. The current framework allows for one main highway, which is the AIFMD marketing passport, allowing for alternative investment funds to be marketed to professional investors within the European Union. I think it's an obvious one for everyone. This means that if you are not, however, a professional investor within the meaning of MiFID, then you are a retail investor, and you may not use such a main highway. Just to recall that the fundamental issue with the professional investor status is that to be able to be considered as professional investor, money is not enough. You need to demonstrate on top of your wealth, that you are either a professional of the financial sector or that you perform a number of transactions, 10 per quarter, on the relevant market over at least four last quarters. When we talk about alternative strategies, doesn't make much sense.
There is another highway which could be used a lot more than today. Relying on the ELTIF level, which grants also a dedicated marketing passport. This one is of little use today, considering that various restrictions are attached to it. And is defacto limited to the higher end of retail investors, and I would say what we call normally on the market high net worth individuals, which do not meet the professional investor qualification under MiFID, but are still considering their financial wealth, able to invest a significant amount in a one fund, one ticket above a hundred K or 125K. So ultimately, ELTIF aside, there is no direct marketing passport in place allowing retail investors, whether high net or not to invest into alternative investment funds.
Harrison Dans:
The objective of this legal mapping exercise is for as many as possible retail investors to reach the alternative strategies that we can see at the top end of the slide here. These are the classical private equity, real estate depth or infrastructure investment strategies that we can see on the Luxembourg market for Luxembourg AIF. the idea is that the owners of expensive and regular cars that we sold before, so the red and green cars are getting there, some routes. And that will to what we call NOFO for some time, no retailization.
The first route, is DF&D marketing passport. Under that regime, , it's only possible to market AIF with a passport, in the European economic area to professional investor only. Those professional investors are the usual suspect. Big banks, insurance companies, pension funds, investment companies, large corporates, trust, supernational entities, university or public endowments, et cetera, et cetera. Although under the MiFID regime, it's possible for some individuals to opt up or opt into the status of professional investors, the criteria to get there are very strict and difficult to obtain anything that is not listed as a professional client in annex two of the MiFID Directive is basically a retail client., you can only see our instruct on the slide, and it's normal. We can fairly say that the EU regulation is binary and discriminate between marketing to professional investors, versus marketing to retail investors.
The first way to open the market or the marketing to retail investors under EU alone, it's actually via the passporting., under Article 32 of the AIFMD, certain countries that are listed on the slide, you can see Belgium, Italy, Austria, Denmark or Germany, has extended the possibility for an AAFM that has applied for marketing passport in their country, under certain criteria that are imposed by their national laws and regulations to opt in for the passport. And to get to some sort of retail investors. But these are only red cars. Because, depending on every country's criteria, the smallest ticket site that can be imagined here is one hundred thousand euros. on high net worth individuals. Those mechanisms are not feasible in other many transactions such as Luxembourg, Spain, France, the Netherlands, Norway or Sweden.
A big point of attention here is that irrelevant or what or not your product is passport. When you get or you try to get investors, it is necessary to produce, to put in place PRIIPS KID . And that's important. Yes, another well-known highway that Aurélien mentioned, to passport AIF to professional but also to some retail clients, to so-called ELTIF regime that has been set up since 2016, with the ELTIF regulation. But this product along with the USF and EuVECA has proven not to be attractive enough., no more than 30 ELTIFs have been created in Europe since the ELTIF regulation came into force. The vast majority of which were lodged from Luxembourg or France, which represent less than roughly 2 billion in assets under management. Which is not very significant.
This is mainly due to the fact that both in terms of eligible investors and eligible investments, the ELTIF regulation is too cumbersome, and almost not maneuverable at all.. Indeed, today the criteria to onboard retail investors ELTIF levelized fund are those presented on the yellow table at the direct inside of our slide, IE only retain investor with a portfolio of financial instrument in excess of 500,000 euros are eligible. Or if less than 500,000 euros, in excess of 100,000 euros with minimum investment of 10,000 euros, and maximum of their overall financial instruments of 10% invested in ELTIF. Which is, again, quite strict. And it is fair to say that ELTIFs are only open to at-network individuals and not all type of retail investors.
Let's not forget about Brexit. If you are intending to market the ELTIF to retail investors in the EEA. then come the two side roads, we call them side roads because there is no passport here. The first one is open through the Article 43 of the AIFMD, according to which each member states may allow marketing to retain investors on their territory under certain conditions which are set out in their national private platform rules. These are the circles NPPRs. In a way, managers of certain types of funds will create their own tailor-made passport regime, by complying each time with the local and procured condition. And reaching out, again, each time to the local regulators of each country, allowing the marketing to investors under their homemade conditions.
it will be done on a country-by-country basis, which is actually more or less feasible in almost all jurisdiction of the EEA except for France. In Luxembourg, for instance, we see a trend to use the UCI Part II regime of the 2010 law, for that purpose. large asset managers have started to use this vehicle which is fully authorised and regulated by the CSSF to attract retail investors. But this time, with very small ticket size, can be in the range of a thousand of Euro, for instance.
They are a bit more conventional cars, the green cars on that route, on that side road., it's not, , a harmonised regime. the time to market to create that kind of product can be a challenge. And finally, the last road we have is actually the one on the very right hand side of my presentation, which is the prospectus regulation, and all the possibilities offered under again the NPPR regime.
Aurélien Hollard:
There is the NPPRs under the distribution scheme. But they are as well NPPRs under other schemes. most important one being the capital market one. the prospectus regulation is, of course, the key regulation in that respect. And that's kind of road is also a road which can be used by professional investors, but as well high net worth individuals and as well, ordinary investors. it's also as well a smart way to raise retail money. But this depends on, of course, a given strategy, because some of them are more or less compatible with a capital market approach. For instance, if you think of Luxembourg relying mostly on securitization solutions for that purpose, then that strategies would be quite popular. However, would be a lot more complex to accommodate an equity strategy, depending of course, whether it's a minority strategy or majority equity stake.
There are a lot of complexity around it. As well, out of Luxembourg, we would say the majority of the offerings are made via private placements, relying on existing exemptions under the prospectus regulations. So typically targeting those NPPRs. they are quite well known on the market for less than 150 retail investors per EU country, less than five or 8 million raised from retail investors over 12 month, or a minimum ticket size of a Euro a 100K. Meaning that if you are high net worths individuals with a ticket of 100K, then normally, you may use that road that option without any issue from an authorised offering perspective. this can be quite efficient.
there is still the opportunity to have those offerings being authorised by the regulator, by the CSS. under the prospectus regulation, and we have done so in the past, so it's not so common, but it can be a very innovative way to raise funds from retail investors by having an offering of securities authorised by the regulator Luxembourg, or CSF in particular. And passported under the prospectus regulation passport in other countries. But of course, this is the picture of the present and we are very excited about the future and the shortcoming future. And notably about the revision of the ELTIF regulation. As you can see now on the slides, the highway, which was really a small one of the ELTIF, is expected to get a lot more importance in the future and become a true highway. Which was initially the intention of that ELTIF label. we are about to see that new regulation coming to force.
the council and the European Parliament reached a provisional agreement on the revised final version of the ELTIF regulation. one can expect that this regulation will be published before the end of the year, meaning that it should be enforced by mid next year, probably end of June next year, the regulation should be in place. When we consider that it takes about six months to launch an ELTIF and have it approved, probably if you think of raising funds from retail investors today in an alternative strategy, you may already start to design and think of launching that product, even by the end of the year. And the changes contemplated will allow a lot more flexibility, making these products a lot more relevant as well for a number of strategies. In particular, there is the expansion of the scope of eligible assets, and at the same time, the lowering of the threshold of eligible assets.
Only 50% should be required. We still waiting for the very last version to be published. let's see if there are last-minute changes, but that should be the case. Then what is clear that it will be a broadening of the scope of real assets, and we know it has been a hurdle for a number of real asset strategy. And the removal of the minimum value of 10 million pair real assets, which was a hurdle as well to put ELTIF strategies in place. There will be the permission to allow for co-investments. And that's quite key, because we know today, fund managers were considering launching ELTIF more as their parallel vehicle for retail investors while they had in parallel a vehicle for institutional professional investors. And having those two vehicles being able to invest side by side was quite key. So that should be the case as well possible for the future.
the market capitalization will be increased from 500 million to 2 billion to be able to qualify the portfolio undertaking, which is really key in the investment universe. And what is even more key in the objective to raise funds from retail investors is to allow fund the fund strategy, because we can anticipate that retail investors will be particularly interested in that type of product. And as well, allowing more for semi-liquid or open-ended product by reducing the initial lockup period to, we hope, at least three years. this is likely to facilitate retail investors to join ELTIF. However, that's not the only criteria which will facilitate the distribution of ELTIF to retail investors. Aurélien mentioned the various hurdles we had, we have still today, and which would remove in the future. No longer there will be the 10 euro, 10K initial minimum investment requirement. No longer there should be that 10% cap on the portfolio's exposure for to the ELTIF for investors with a portfolio of less than 500K. That will open ELTIF product to true retail investors, and not only to high-net-worth individuals.
There are some welcomed changes like the alignment of the suitability test with the MiFID II requirement, and as well removing the obligation for local facilities when distributing the ELTIF to retail investors.. another big expectation in is on the reform of the AIFMD II. So no longer only on the ELTIF for the whole market in general is, and here again, we are quite excited about the fact that in the very last versions which were circulated and discussed still at the European Parliament, there is a not almost definition of professional investor. Meaning that the professional investor definition today is referring to MiFID definition, and is fully aligned with a MiFID definition. And potentially in the future, there will be the opportunity to have another category of professional investor under AIFMD, which would be investor investing a minimum of a 100K, and as well of course, accepting to be exposed to a certain level of risk without any additional conditions.
basically in the future, and here we are not talking about mid next year but more 2025, 2024, '25. it'll take a bit of time unfortunately, but still, we are going the right direction. If you are high net worth individuals as from a 100K, you should be able to invest in all IFMs, and even all Ifs, and even relying on the marketing passport. So again, we see a great opportunity in the near future, and that's why we thought that webinar was very timely.
