It has been well documented that since the collapse of the financial markets in 2008, the banking system across the Eurozone has been deleveraging and flows of credit have been constrained. However, according to a recent EU Impact Assessment, infrastructure transaction volumes have been stable at between €100 and €150 billion each year since 2007, indicating a consistent demand for financing.
The size of the EU property fund market, which is difficult to assess, is estimated at €258 billion. The aircraft that have been ordered but not yet delivered is estimated to be approximately USD 700 billion worldwide. An estimated €1,500 to €2,000 billion will be needed to finance infrastructure project requirements in Europe up to 2020. This indicates a need for large scale financing and a move from traditional backing to alternative sources of capital from asset management.
With this in mind, the European Commission proposed a harmonised pan-European regime for European Long Term Investment Funds (ELTIFs). The ELTIF regime is designed to increase the amount of non-bank finance available for companies investing in the real economy of the European Union. It is envisaged that ELTIFs will be offered to investors in any EU country, with a minimal amount of red tape.
The Funds will need to meet certain rules covering the types of assets and companies they can invest in, the provision of information to prospective investors and how they are set up and managed. The aim is that businesses would be able to obtain capital from a wider pool of investors than they can at the moment. Furthermore, investors would be able to put money into a more diversified range of assets. It is hoped that the initiative will ultimately culminate in greater investment opportunities and the creation of more jobs in Europe.
ELTIFs will invest primarily in companies and projects that require long term capital. For example, unlisted companies, real assets that need long term capital in order to develop, European Venture Capital Funds and European Social Entrepreneurship funds. ETLIFs will have up to five years to invest at least 70% of the money. This is to provide the ELTIFs with some flexibility regarding when to sell or replace assets.
The 30% buffer can be held in assets that would be eligible for Undertakings for Collective Investment in Transferable Securities (UCITS) Fund. At least 60% of the fund’s capital on securities must be issued by an eligible portfolio undertaking established in the EU. The funds will be restricted on derivatives’ holdings and short selling will not be permitted.
Opportunity for Ireland?
Ireland is well placed to take advantage of the proposed introduction of ELTIFs. This product will enhance Ireland’s well established funds offering and will follow soon after the introduction of the Irish Collective Asset Management Vehicle (ICAV) and the Loan Origination Qualifying Investor Alternative Investment Funds.
These initiatives represent additional structural options to managers that will complement the existing options available in Ireland and will further enhance Ireland’s reputation as the asset management domicile of choice.
This is evidenced by the growth of Irish Funds as a market for non-bank finance. From January 2014 to March 2015, the number of fund and net asset value witnessed a sustainable growth, while Irish Funds are now distributed in over 70 countries all around the world.
Ireland ranks consistently as the strongest growing major fund domicile in Europe over the last 10 years. Ireland has the largest number of stock exchange listed investment funds. With over 7,300 fund share classes listed, the ISE is recognised worldwide as the leading centre for listing investment funds. Investment managers from over 40 global locations list their funds on the ISE. Furthermore, over 40% of global hedge fund assets are serviced in Ireland.
Europe’s current reliance on banking finance will change. As the future of capital markets continues to play an important role in financing the most innovative companies in Europe, Ireland must continually be agile and responsive to the legislative changes being discussed on the global stage.
The Capital Markets Union offers Europe an opportunity to make markets more efficient and provide investors a mechanism to enhance returns while creating growth and jobs. A strong asset management sector exists in Ireland which can service this growing financial service market and is being targeted as part of the government IFS 2020 strategy.
Why Grant Thornton?
Grant Thornton’s approach to asset management is focused on providing solutions to the sector that anticipate and address the impact of changes in its environment. Core services of audit and tax compliance have been expanded to recognise the challenges of increasing regulation, changes to distribution models, cybersecurity and global demands for increased operational efficiency and transparency. We have built strong teams in each of these areas and continue to deepen our expertise. EU audit reform will also bring new requirements in opening up professional services opportunities.
The challenges facing the industry cannot be looked at in isolation and we find the greatest benefit to our clients comes from our subject matter experts working together to provide practical and innovative solutions. Asset management is a global business and so we work closely with our colleagues in Grant Thornton international in bringing together local expertise in key jurisdictions.
There can be little doubt that the fast pace of change will continue for the industry – we are working with our clients to ensure that they are able to take advantage of the opportunities that these changes will bring.
Niamh Meenan, Global Head of Asset Management, Grant Thornton
Sunday Business Post