Horizon Scan For Private Investment Funds

Goodwin Procter LLP


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Welcome to the second edition of our Horizon Scan for 2024: key recent and expected funds, regulatory, and tax developments to look out for.
European Union Finance and Banking
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Welcome to the second edition of our Horizon Scan for 2024: key recent and expected funds, regulatory, and tax developments to look out for. As before, we focus on the most important developments and changes that we expect to be of interest to those in the private funds and investment management sectors. This Horizon Scan is aimed at fund managers based in Europe and includes cross-border content on US sustainable finance issues, other US topics relevant for non-US managers marketing in the US, as well as some country-specific developments. The topics are divided as follows (and include a couple of new sections to our February 2024 Horizon Scan):

  • UK, EU, and General Funds Developments
  • Sustainable Finance (UK, EU, and US)
  • Regulatory Developments (UK and EU)
  • Financial Crime and Sanctions (UK)
  • Tax Topics (UK and EU)
  • US-Specific Developments for Non-US Fund Managers
  • Country-specific developments (including France, Germany, Luxembourg and Singapore)

We are currently experiencing a short political and legislative interinstitutional pause in Europe due to the Parliament elections in early June. Although we have seen some initiatives, such as debate to progress the EU Retail Investment Package, delayed until after the elections, and are likely to see a lull in general over the Summer, we would still expect some output before the Council of the EU Presidency rotates to Hungary in July (in particular on the level 2 measures expected pursuant to the amended Alternative Investment Fund Managers Directive (AIFMD2) and on the finalisation of the Regulatory Technical Standards for the revised European Long-term Investment Fund Regulation (ELTIF 2.0)). In contrast, the upcoming US and UK elections, in particular, may create more of a sense of expediency to prevent slippage in some initiatives. Despite these shifting political dynamics, we would expect the broad themes that influence the legislative developments, as discussed below, to remain the key pace-setters. We have set out our thoughts and expectations on how we see these three themes impacting the private funds and investment management sector.

Theme Comment
Sustainable finance and regulatory focus on greenwashing

For those subject to the EU's Sustainable Finance Disclosure Regulation (SFDR), a pending overhaul and possible introduction of a labelling regime under an SFDR II weighs against ongoing compliance with many grey areas under the existing framework and the possible introduction of significant technical revisions to the level 2 regulatory technical standards and amended disclosure templates. In addition, many managers will want to proactively screen and/or adapt funds to comply with the recently finalised ESMA guidelines on fund names using ESG or sustainability-related terms (managers of existing funds will have a six-month period in which to comply following publication and once translated, whilst the Guidelines will apply to new funds immediately on publication). The asymmetry with the ESMA guidelines and equivalent rules under the UK's Sustainability Disclosure Requirements (SDR) and the US SEC fund names rules is unsurprising and matches the inability to easily map the disclosure requirements in general across regimes.

The current stay of the US SEC climate disclosure rules also creates some uncertainty regarding future mandatory compliance dates and which requirements, if any, will survive the various court challenges. Certain companies may be subject to similar requirements anyway, either because they are also subject to non-US regulations or because their investors and other important stakeholders are asking for the same information.

In our experience clients continue to strive to implement best practices, seek advice, and commit resources to these oftentimes complex regulatory requirements and market expectations.

The further "retailisation" of investments that would otherwise be available only to professional investors

There remains optimism about retail investment in long-term illiquid assets. In the UK, there have been several recent developments designed to reduce investment barriers to help drive defined contribution (DC) pension schemes' investment in private capital and accelerate interest in the Long Term Asset Fund (LTAF). There are key obstacles in the move away from the daily dealing with which DC schemes are most familiar. First are liquidity mechanics: the LTAF cannot offer redemptions more frequently than once a month (in practice, they are likely to be quarterly redemptions), and it is subject to a mandatory notice period of at least 90 days for redemptions. Secondly is the cultural and operational shift to consider performance, value for money, and manager track records instead of costs alone.

In the EU, the revised ELTIF 2.0 framework may well appeal — the fact that its AIFMD marketing passport covers retail investors is a particular benefit. However, many fund sponsors may find that they are able to target semi-professional investors without using the ELTIF, subject to traditional methods under AIFMD. Therefore, the key use for the ELTIF may be mostly for those sponsors targeting more traditional retail investors with small-ticket investment amounts.

As the EU Retail Investment Strategy and the UK's Alternatives Supervisory Strategy demonstrate, adequate protection of those retail investors participating in EU capital markets protection remains a regulatory priority.

Loan origination under AIFMD2

AIFMD2 was finalised on 26 March 2024 and entered into force on 15 April 2024. Member states have 2 years (ending on 16 April 2026) to implement.

The main change of impact under AIFMD2 relates to new provisions on "loan origination" by an AIF — as well as for "loan-originating AIFs." Some additional provisions (such as the requirement to be closed-ended and leverage limits for open and closed-ended AIFs) relate only to "loan-originating AIFs," including those AIFs that originate loans as a principal activity rather than alongside other activities. There is a lot of detail to get to grips with, and, as we are used to in terms of EU Directives, there is much detail to follow from ESMA in implementing measures.

The new provisions on loan origination clarify that an AIFM may act on behalf of AIFs established in other member states to allow them to lend. However, we think that it is going too far to say that there is a lending passport, noting that the AIFMD passport rights apply to managers rather than the funds (and it's funds that are the usual lenders). Moreover, member states will be free to introduce more restrictive rules in general (as well as being able to prohibit AIFs that originate loans from granting loans to — and servicing credit for — individual consumers).

Our Horizon Scan follows a table format, and along with our comments on each issue, we have highlighted who is likely to be most affected and the current level of priority.

Click here to access the Horizon Scan. You can also listen to our short podcast, in which two of the co-authors, Andrew Henderson and Chris Ormond, discuss the key themes of this edition.

We plan to continue to refresh and update this Horizon Scan in or around October 2024 and January 2025. In the meantime, please speak to your usual Goodwin contact or one of the co-authors of this briefing for any further detail or if you want to discuss how any of these initiatives may affect your fund structures, investments, or any other aspects of your business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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