COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on European Long-term Investment Funds
Date: 2013-06-26
Institutions: European Commission
Subjects: cross-border cooperation, impact study, investment company, investment promotion, long-term forecast, money-market liquidity, single market, small and medium-sized enterprises

EUROPEAN 
COMMISSION 

Brussels, 26.6.2013  
SWD(2013) 230 final 

COMMISSION STAFF WORKING DOCUMENT 

IMPACT ASSESSMENT 

Accompanying the document 

Proposal for a 
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
on 

European Long-term Investment Funds 

{COM(2013) 462 final} 
{SWD(2013) 231 final} 

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1. 

2. 

2.1. 

2.2. 

2.3. 

3. 

3.1. 

Introduction .................................................................................................................. 6 

Procedural Issues and Consultation of Interested Parties ............................................ 7 

Related EU initiatives .................................................................................................. 7 

Consultation of interested parties................................................................................. 9 

Impact Assessment Steering Group and IAB............................................................. 10 

Problem Definition..................................................................................................... 11 

Problem drivers .......................................................................................................... 11 

3.1.1.  Regulatory fragmentation makes it difficult for investors to gain exposure to long-

term assets .................................................................................................................. 11 

3.1.2.  The diversity of long-term assets creates a potential for misplaced expectations from 
investors ..................................................................................................................... 12 

3.2. 

Problems..................................................................................................................... 17 

3.2.1. 

Inefficient market for pooled investments impedes access to finance....................... 17 

3.2.2.  Potential investors in long-term assets are currently deprived of an appropriate 

investment vehicle...................................................................................................... 18 

3.2.3.  Managers face barriers to activity, costs and reduced economies of scale ................ 20 

3.3. 

3.4. 

3.5. 

4. 

5. 

5.1. 

6. 

6.1. 

Consequences of the problems................................................................................... 21 

How would the problem evolve without EU action? The baseline scenario ............. 22 

EU’s right to act and justification for acting.............................................................. 23 

Objectives................................................................................................................... 24 

Policy Options............................................................................................................ 25 

Identification of options ............................................................................................. 25 

Analysis of impacts .................................................................................................... 27 

Analysis of options..................................................................................................... 27 

6.1.1.  Option 1: take no action at EU level .......................................................................... 27 

6.1.2.  Option 2: Use soft law to develop an LTI fund label................................................. 28 

6.1.3.  Option 3: Long term assets permitted within UCITS ................................................ 29 

6.1.4.  Option 4: LTI fund for institutional investors............................................................ 30 

6.1.5.  Option 5: LTI fund for institutional investors and HNWI ......................................... 33 

6.1.6.  Option 6: LTI retail fund passport with no redemptions............................................ 34 

6.1.7.  Option 7: LTI retail fund passport with redemptions................................................. 41 

6.2. 

7. 

7.1. 

7.2. 

7.3. 

Impact summary......................................................................................................... 44 

The retained policy option and its impact .................................................................. 47 

The choice of instrument............................................................................................ 47 

Estimate of likely uptake............................................................................................ 48 

Substitution and distributional effects........................................................................ 49 

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7.4. 

7.5. 

7.6. 

7.7. 

7.8. 

7.9. 

Impact on EU fund legislation ................................................................................... 51 

Impact on SMEs......................................................................................................... 52 

Social impact.............................................................................................................. 52 

Environmental impact ................................................................................................ 52 

Impact on Member States........................................................................................... 53 

Impact on third countries ........................................................................................... 53 

7.10.  Risks........................................................................................................................... 53 

8. 

Monitoring and Evaluation ........................................................................................ 53 

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Impact assessment on the Proposal for a regulation on Long Term Investment Funds (LTIFs)   

Executive Summary Sheet 

Why? What is the problem being addressed? 

A. Need for action 

Investors are often too short term in perspective, reducing investments into longer term assets such as 
infrastructure projects. Tackling this will help stimulate the real economy by providing a further source of 
funding  for  businesses.  It  will  also  provide  investors  with  fresh  options  for  accessing  long  term  assets 
which can generate good profits.  

Currently accessing these assets can be difficult. Investment funds are a key way of investing in them, 
but there are no common standards among Member States (MS) so the market is fragmented, leading 
to higher costs and conflicting terms and definitions are used. Investor protection standards can be too 
low. This has discouraged or blocked investors from targeting long-term assets, such as infrastructure 
projects or participations in SMEs. 

This  proposal  would  create  a  harmonised  set  of  product  rules  (for  ‘Long  Term  Investment  Funds’  or 
LTIFs) which would address these problems and so help stimulate growth in the real economy. 

What is this initiative expected to achieve? 

A  LTIF  brand  would  be  created,  developing  a  new  market  for  these  funds  targeting  long  term  assets. 
This  would  increase  investment  into  the  real  economy,  and  provide  an  alternative  source  of  capital  to 
bank lending. Impacts would be maximised by developing harmonised product rules for LTIF. Allowing 
access to the widest possible range of investors will maximise the amount of capital available for firms. 
For this reason, the funds will be free to market cross-border to both institutional and retail investors.  

The new LTIF framework will offer a secure investment environment for investors seeking exposure to 
long-term assets. Existing national regimes are not always sufficient to offer the kind of protection retail 
investors need. 

What is the value added of action at the EU level? 

The  market  for  long-term  assets  is  currently  highly  fragmented  with  Member  States  subjecting  funds 
targeting  them  to  varying rules.  This  is  a  barrier  for  fund  managers, who  have  to  deal  with  a range  of 
legal  issues  depending  on  the  Member  State.  Costs  are  raised  and  fund  sizes  constrained.  The 
experience  of  UCITS  shows  that  a  strongly  regulated  product  structure  can  be  very  successful  in 
attracting  substantial  amounts  of  capital  from  both  institutional  and  retail  investors,  and  in  building  a 
cross-border market. 

B. Solutions 

What  legislative  and  non-legislative  policy  options  have  been  considered?  Is  there  a 
preferred choice or not? Why? 

A range of options have been considered: no action; non-legislative action; and then a range of options 
for creating cross-border rules with each subsequent option widening the potential audience of investors 
able to use them. 

The  preferred  option  is  to  create  a  LTIF  open  to  all  types  of  investors,  including  retail  investors,  with 
strong product rules and set up as a closed-ended fund.  

To  tackle  divergences and  fragmentation  between  Member  States,  a  legislative  measure  is  needed  to 
create  a  consistent  regulatory  framework  for  LTIF  and  to  ensure  better  cross  border  marketing  to  all 
types of investors. 

To  address  possible  mis-selling  to  retail  investors,  the  new  LTI  fund  would  need  harmonized  product 
rules  to  mitigate  risks.  To  this  effect  rules  in  the  areas  of  diversification,  derivatives,  transparency, 
leverage, and conflict of interest are necessary. The fund would remain closed to redemptions. Strong 

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investor protection standards create a solid basis for facilitating the marketing of LTIFs to all investors.  

Who supports which option? 

Stakeholders  from  the  asset  management  sector  are  mainly  supportive  of  this  initiative.  Those  with 
experience  with  the  UCITS  market  are  generally  more  positive  that  a  retail  regime  is  necessary  while 
those coming form the private equity and infrastructure background are more mixed on this issue. The 
few contributions received from investors suggest an appetite for investing in long-term assets but the 
views are however how this structure should work. Supervisors have not yet expressed strong views. 

What are the benefits of the preferred option (if any, otherwise main ones) 

C. Impacts of the preferred option 

Permitting cross-border marketing to all investors, including retail, allows the deepest capital pools to be 
drawn on. Using closed-ended funds has the advantage of permitting investments in all types of long-
term assets as the structure better matches the illiquidity profile of these assets. Such a solution has the 
merit of being transparent as to the long-term commitment that investing in such assets requires. It also 
is  relatively  simple  (in  that  complex  liquidity  management  is  not  necessary.  Greatly  improved  and 
harmonized  product  rules  may  mitigate  risks  of  mis-selling,  particularly  also  in  the  context  of  rules 
already applying to distributors to act in the best interest of their clients. Institutional investors also can 
prefer clearly harmonised and regulated products. 

Fund  managers  would  choose  whether  or  not  to  take  up  the  preferred  option,  though  they  would  be 
bound  by  it  if  they  opted  to  use  it.  This  means  estimating  the  scale  of  uptake  is  difficult  ex  ante; 
experience  in  the  UCITS  market  suggests  a  well-defined  and  understood  brand  can  evolve  into  a 
globally dominant model. 

Indirect social impacts could include better financing of social housing projects, of health infrastructure, 
and of green projects, which all fall within the scope of eligible assets.  

What are the costs of the preferred option (if any, otherwise main ones)? 

The fact that such funds would not allow redemptions during their lifecycle may limit the range of retail 
investors willing to invest in such funds, particularly where offered with ten year or longer time horizons. 
Risks  remain  that  retail  investors  invest  in  such  funds  without  fully  grasping  the  risk  and  liquidity 
consequences,  even where  disclosures  are  transparent  and clear.  Should  retail  detriment  arise  that  is 
not  effectively  mitigated  through  MiFID  rules  or  the  rules  under  the  preferred  option  –  through  either 
active  mis-selling  and  non-compliance,  or  investors  failing  to  undertake  sufficient  due  diligence  –  this 
could negatively impact the development of an LTIF market. 

Since setting up LTIF is optional for managers, hard costs are not relevant.  

How will businesses, SMEs and micro-enterprises be affected? 

The creation of an LTIF would have indirect impacts for the financing of SMEs. SMEs represent one of 
the core assets in which the LTI funds will be able  to invest. This can be achieved either by providing 
loans  or  by  acquiring  (direct)  equity  participations  in  the  companies.  The  creation  of  pan-European 
LTIFs will not address all of the challenges SMEs face in accessing financing, but it can contribute to a 
wider range and depth of alternative sources of financing, alongside banks. 

Will there be significant impacts on national budgets and administrations? 

No 

Will there be other significant impacts? 

No  other  significant  impact  except  an  indirect  impact  on  third  countries.  The  new  LTI  framework  may 
represent  an  added  value  for  potential  investment  targets  domiciled  in  third  countries.  In  addition  the 
newly created  LTI  fund  might  represent  an  export  label  as UCITS  does currently  for  funds  invested  in 
transferable securities. 

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D. Follow up 

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When will the policy be reviewed? 

The  forthcoming  legislation  will  be  subject  to  a  complete  evaluation  (about  4  years  after  its 
implementation deadline) in order to assess, among other things, how effective and efficient it has been 
in  terms  of  achieving  the  objectives  presented  in  this  report  and  to  decide  whether  new  measures  or 
amendments are needed. 

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1. 

INTRODUCTION  

In  the  aftermath  of  the  financial  crisis,  academics,  policymakers  and  industry  experts 
highlight  a  tendency  toward  short  term  behaviour.  Investors  have  tended  to  focus  on  short 
term investment returns, strongly reflecting market fluctuations, and on assets that are capable 
of being readily sold. What they have not done is to focus on the return profile of assets held 
over the long term.  

Yet  taking  a  long  term  perspective  and  investing  in  asset  classes  which  require  longer  term 
commitments  from  investors  can  have  benefits  for  investors  and  for  the  economy  more 
widely.  For  instance,  investments  in  energy  generation  and  distribution  or  transport 
infrastructure  can  reduce  costs  for  individual  firms,  raise  employment  opportunities  and 
provide  investors  with  a  steady  rate  of  return.  The  importance  of  such  'knock-on'  effects 
means  that  any  tendency  toward  short  term  behaviours,  to  the  detriment  of  long  term 
investments, should be addressed. 

The Commission  Green Paper on  financing long term investment in the European economy 
(Green Paper) examines options that might be considered  in different areas for encouraging 
long term investments.1  

This  impact  assessment  focuses  specifically  on  asset  management  and  options  for  fostering 
long term investments through private investment funds.  

While the EU Directive on Undertakings in Collective Investment in Transferrable Securities 
(UCITS)  creates  a  cross-border  framework  for  investment  into  mutual  funds,2  these  funds 
must  remain  able  to  offer  redemptions  on  demand.  This  redemption  profile  requires  a 
portfolio  of  liquid  transferable  securities,  such  as  bonds  and  shares.  This  means  long  term 
investments under UCITS can only take the form of a ‘buy and hold’ investment strategy built 
on  liquid  assets.  UCITS  cannot  execute  direct  investments  in  unlisted  entities  or  engage  in 
participations in projects.  

Asset classes excluded from UCITS are, however, key to long term financing. They directly 
contribute  to  the  growth  and  financing  of  projects,  companies  and  infrastructure  across  the 
EU.  These  assets  typically  share  certain  core  features:  they  require  long  term  commitments 
but  also  provide  income  over  the  long  term.  They  are  generally  illiquid,  so  that  selling  an 
asset  can  be  difficult,  and  the  assets  are  rarely  listed  on  secondary  markets.  Long-term 
investments can take the form of equity or debt investments covering equity or quasi-equity 
participations,  debt  or  loans  provided  to  fund  infrastructure,  small  to  medium-sized 
enterprises (SMEs) or property projects.  

Such  long  term  assets  can  also  be  attractive  for  many  investors,  but  there  is  a  clear  lack  of 
opportunity to buy these assets on the European market: 

• 

Institutional investors such as pension fund operators, insurers or foundations with set 
liabilities  (e.g.  pay-outs  to  members  on  retirement  by  pension  funds)  which  have  a 
timeline  that  places  them  far  in  the  future,  for  whom  shorter-term  liquidity  of 
investments is not as important as matching these liabilities over this longer-term time 
horizon. 

1  

2  

http://ec.europa.eu/internal_market/finances/financing-growth/long-term/index_en.htm. See also The Kay review of 
UK equity markets and long-term decision making, Final report, July 2012 
Such funds have amassed around €6,350 billion in assets under management (AuM), which equates to about 72% 
of AuM in the EU. EFAMA Investment Fund Factsheet, December 2012 

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•  Some investors specifically seek long term assets, e.g. foundations or businesses that 
commit  to  support  sustainable  investments,  including  those  driven  by  innovation,  or 
seek to include investments that achieve specific social or environmental impacts (e.g. 
green infrastructure investments). 

Despite this demand, the development of cross-border investment funds targeting these assets 
face a number of problems: 

•  There is currently no EU-wide fund framework dedicated to long term assets – with a 
common  definition  of  such  assets  --  and  recognisable  by  any  type  of  investor.  A 
patchwork  of  national  rules  means  funds  offering  targeted  long  term  investment 
opportunities are not easily identifiable by smaller institutional investors and may be 
inaccessible to retail investors due to regulatory restrictions.   

•  Funds  are  required  to  comply  with  diverging  national  requirements  incur  legal, 

administrative and marketing costs.  

•  Regulations  have  not  always  served  investor  needs  well  enough:  investors  in  funds 
that  appear  to  target  long  term  assets  have  not  always  properly  understood  the  long 
term nature of the commitment and the specific risk profile of these assets and funds3. 
This undermines confidence. 

This  report  will  focuses  on  examining  these  problems  and  options  for  addressing  them.  It 
identifies options for funds capable of making investments into illiquid assets not covered by 
UCITS. 

2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

Related EU initiatives 

2.1. 
Smart, sustainable and inclusive growth is at the heart of the Europe 2020 vision.4 Promoting 
long term investment over short term investment is a clear driver for achieving these targets. 
Increasing levels of long term investment will contribute to all of the five targets identified in 
the Europe 2020 vision (employment, research and development, climate change and energy 
sustainability, education and fighting poverty and social exclusion).  

More specifically, the Commission highlights access to a greater mix of quality finance as a 
key  issue  in  the  2013  Annual  Growth  Survey,5  calling  on  Member  States  to  do  more  on 
alternative sources of financing. The Commission action plan to improve access to finance 
for SMEs has also outlined many of the wide range of measures needed.6 In this respect, the 
equity  financial  instruments  proposed  under  the  Programme  for  the  Competitiveness  of 
Enterprises and SMEs (COSME),7 as well as under Horizon 2020,8 play a significant role as 
drivers of long-term financing. COSME in particular plays a key part in attracting institutional 
investors  back  to  the  venture  capital  industry  by  establishing  cross-border,  pan-European 
funds-of-funds. 

The  Commission  is  also  committed  to  improve  the  digital  infrastructure  in  Europe,  notably 
with the Connecting Europe Facility (CEF). 

3  
4  
5  
6  
7  
8  

See Annex 3 for examples of mis-selling examples 
http://ec.europa.eu/europe2020/europe-2020-in-a-nutshell/index_en.htm. 
See http://ec.europa.eu/europe2020/making-it-happen/annual-growth-surveys/index_en.htm. 
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0870:FIN:EN:PDF.  
http://ec.europa.eu/cip/cosme/index_en.htm. 
http://ec.europa.eu/cip/cosme/index_en.htm 

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The  Single  Market  Act  I  (SMA  I)  underlined  sustainable  finance  for  SMEs  and  social 
entrepreneurs as key to tackling poverty and social exclusion and increasing employment. The 
creation  of  European  Venture  Capital  Funds 
(EuVECA)  and  European  Social 
Entrepreneurships Funds (EuSEF) illustrates the practical  implementation of these measures 
in  the  area  of  investment  funds.  Raising  the  availability  of  long  term  investment  clearly 
contributes directly to the pool of available patient capital.  

Further steps are being taken to deepen long term financing: see for instance, the provision of 
financing through EU financial instruments notably under the cohesion policy, investments by 
the European Investment Bank, and the Europe 2020 Project Bond Initiative.9 

Within  this  broader  context  of  multi-stranded  work  on  long  term  investment,  the  Single 
Market Act II (SMA II) announced under key action 6 there will be specific work on long 
term investment funds: “In addition, the Commission will make proposals on possible forms 
of long term investment funds. Investment funds can open new sources of financing to long 
term projects and private companies. They can constitute an attractive offer to retail investors 
who seek to invest long-term, diversify risk and prefer stable and steady returns with lower 
volatility,  as  long  as  the  necessary  degree  of  investor  protection  is  ensured”.10  This  impact 
assessment assesses options for key action 6. 

The  options  examined  in  this  impact  assessment  are  a  sub-set  of  the  broader  possible 
measures announced in the Commission Green Paper on financing long term investment in 
the European economy (Green Paper).11 The Green Paper explores demand and supply side 
issues and developmental trends across the markets for long term financing, and identifies a 
series  of  measures  to  be  explored  for  tackling  these  issues  or  areas  in  which  further  work 
might  be  done.  This  includes  investors'  behaviour  (appetite  for  and  adoption  of  long  term 
investment  perspectives);  prudential  rules  impacting  institutional  investors  handling  of 
different  types  of  assets  or  behaviours  of  fund  managers  (increasing  focus  on  long  term 
perspective  when  investing  in  short  term  assets).  Responses  to  the  Green  Paper  will  inform 
broader actions on long term investment, but the Green Paper does not address in detail the 
area  covered  by  this  impact  assessment,  in  which  consultations  had  already  commenced  in 
July 2012, as set out under 2.2 below.  

Nevertheless, the evidence collected in the course of the asset management consultation of 26 
July 201212 revealed that investment funds can provide a highly regulated vehicle to channel 
investor's assets to a variety of asset classes. The evidence reflected in this impact assessment, 
therefore,  suggests  that  a  new  investment  fund  vehicle  focusing  on  long-term  asset  classes 
could easily be developed on the basis of  certain structural elements already 'tried and tested' 
in the context of the successful UCITS framework. This is because the essential ingredients of 
a pan-European framework for asset management – a precise catalogue of assets that would  
be eligible for the cross-border fund vehicle, its risk diversification, exposure limits and rules 
to limit recourse to leverage – are already in place for the UCITS framework. This set of basic 
rules could be easily transposed and, if necessary adapted, to create a comparable cross-border 
vehicle  for  investment  funds  that  do  not  focus  on  transferable  securities  but  on  less  liquid 
long-term  asset  classes,  such  as  participations  in  unlisted  infrastructure  projects,  unlisted 
SMEs or real assets that are necessary to develop the European economies.  

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10  

11  
12  

See http://ec.europa.eu/economy_finance/financial_operations/investment/europe_2020/index_en.htm.  
See for SMA I http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0206:FIN:EN:PDF, e.g. Levers 
1 and 8. For SMA II http://ec.europa.eu/internal_market/smact/docs/single-market-act2_en.pdf, p. 10. 
http://ec.europa.eu/internal_market/finances/financing-growth/long-term/index_en.htm 
See http://europa.eu/rapid/press-release_IP-12-853_en.htm?locale=en 

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In light of the previous wealth of experience that exists in the design and creation of EU-level 
investment fund vehicles, this impact assessment concludes that the time is ripe for action at 
an early stage, without the need to await the outcome from the much larger consultation on 
long-term investing that is launched by the above mentioned Green Paper.    

In  addition,  the  high  level  of  participation  and  interest  in  the  July  2012  consultation  on 
various  topics  in  the  field  of  asset  management  reveals  that  stakeholder  expectations  with 
respect to a 'second passport' for long term investment vehicles are high. The level of interest 
displayed  and  the  concrete  nature  of  many  of  the  stakeholder  responses  shows  that 
considerable  thinking  into  the  possible  design  of  a  fund  passport  for  long-term  investment 
funds  has  already  taken  place  and  that  awaiting  the  more  general  and  conceptual  responses 
from  the  Green  Paper  would  not  deepen  the  Commission's  knowledge  pool  on  how  to 
structure a fund passport for a long-term investment vehicle.   

Finally, as evidenced in this impact assessment, the Commission services convened a series of 
targeted stakeholder roundtable to discuss specific features of a future framework covering a 
second passport for long-term investment vehicles. Such consultations also included extensive 
canvassing of possible investor interest; several representatives of the 'buy side' were also in 
attendance at the relevant round-tables. The consultations also provided the Commission with 
further  insight  into  the  possible  LTI  investor  base  and  the  specific  safeguards  necessary  to 
ensure  that  the  LTIF  framework  caters  to  the  specific  needs  (in  terms  of  yield)  and 
vulnerabilities  of  these  investors  (in  terms  of  the  selection  of  assets  and  in  terms  of  the 
absence of redemptions during the lifetime of the LTIF).  

In light of the above, the conclusion is taken that the evidence gathered is of such substance 
that the results of a much more conceptual consultation on long-term behaviour, as launched 
by  the  Green  Paper,  would  not  add  any  knowledge  in  the  very  specific  area  of  asset 
management.   

Other  external  factors  that  might  further  increase  the  effectiveness  of  options  explored  here 
are also being assessed in development work linked to legislative proposals which are part of 
Solvency  II.    The  European  Insurance  and  Occupational  Pensions  Authority  (EIOPA)  has 
been  requested  to  take  into  account  longer-term  financing  when  calibrating  that  work,  in 
particular risk weightings when investing in private equity and venture capital funds.  

2.2. 

Consultation of interested parties 

Since  mid-2012  the  Commission  has  been  engaged  in  extensive  consultation  with 
representatives  from  a  wide  range  of  organizations.  The  consultation  has  taken  the  form  of 
bilateral and multilateral meetings, a written public consultation on asset management issues 
including  long  term  investments  (LTI),  and  a  follow  up  questionnaire  which  was  circulated 
amongst interested parties. This impact assessment draws strongly on these consultations, and 
where possible reflections from stakeholders are included. There is broad and strong support 
for action in this area across all kinds of stakeholders. The written consultation noted above 
was part of a broader consultation on various asset management issues13 published on 26 July 
2012.14  The  Commission  services  received  65  responses  related  to  the  LTI  section.  All 
contributions have been thoroughly examined and relevant information contained in them has 
been  taken  into  account  throughout  the  report.15    The  follow  up  questionnaire  led  to  50 
responses and further bilateral discussions with fund managers operating in the infrastructure 

13  
14  
15  

See http://ec.europa.eu/internal_market/consultations/docs/2012/ucits/ucits_consultation_en.pdf 
See http://europa.eu/rapid/press-release_IP-12-853_en.htm?locale=en 
A detailed summary of the responses can be found in Annex 6. 

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and  long  term  markets,  fund  management  associations,  and  both  retail  and  institutional 
investor representatives. 

2.3. 

Impact Assessment Steering Group and IAB 

Work on the Impact Assessment started in October 2012 with the first meeting of the Steering 
group on 7 November 2012, followed by 2 further meetings, the last one taking place on 18 
March 2013. The following Directorates General (DGs) and Commission services participated 
in  the  meetings:  Competition,  Economic  and  Financial  Affairs,  Employment  Social  Affairs 
and  Inclusion,  Health  and  Consumers,  Enterprise  and  Industry,  Legal  Services,  Secretariat 
General,  and  Taxation  Customs  Union.  The  report  and  the  minutes  of  the  last  steering 
group were sent to the Impact Assessment Board on 2 Mai 2013. 

DG MARKT services met the Impact Assessment Board on 29 May 2013. The Board 
analysed this Impact Assessment and delivered its positive opinion on 31 May 2013. 
During  this  meeting  the  members  of  the  Board  provided  DG  MARKT  services  with 
comments  to  improve  the  content  of  the  Impact  Assessment  that  led  to  some 
modifications of this final draft. These are: 

•  The  report  should  better  explain  what  the  real  drivers  of  the  problem  are,  i.e. 

regulatory failures or the result of LTIs particularities/investors' preferences. 

•  The  problem  definition  should  better  describe  and  substantiate,  with  quantitative 
elements  where  possible,  the  magnitude  and  cross-border  dimension  of  the 
problem. 

•  The reasons justifying the timing of the initiative should be clarified, given the on-

going Green Paper consultation on LTI. 

•  Regarding  the  assessment  of  the  options,  the  analysis  should  be  strengthened, 
where  possible  with  quantitative  elements,  notably  with  respect  to  the  impact  on 
administrative burden of the retained option. 

•  The superiority of the preferred option should be better established, for instance by 
demonstrating its greater effectiveness in addressing all identified problems and in 
attracting  sufficient  interest  from  retail  investors  despite  its  lack  of  redemption 
facilities. 

•  The  report  should  clearly  justify  why  some  of  the  choices  made  deviate  from  the 

preferences expressed by stakeholders. 

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3. 

PROBLEM DEFINITION 

Regulatory fragmentation makes it 
difficult for investors to gain 
exposure to long term assets 

The diversity of long-term assets 
creates a potential for misplaced 
expectations from investors 

Problem 
Driver 

Funds deprived of a 
potentially important 
investor base 

Managers face barriers 
to activity, costs and 
reduced economies of 
scale 

Inefficient fund 
market constrains 
access to finance 

Problems 

Untapped single market gains from long term investments 

•  Longer-term financing constrained 
•  Longer-term investing limited 

Conse-
quences 

3.1. 

Problem drivers 

3.1.1.  Regulatory  fragmentation  makes  it  difficult  for  investors  to  gain  exposure  to  long-

term assets  

There  is  currently  no  effective  internal  market  for  pooled  investments  targeting  long  term 
assets.  In the absence of a common EU fund model, national frameworks have proliferated, 
fragmenting the market across the EU and preventing the emergence of a deep investor base 
for  the  long  term  asset  class.  In  addition,  in  those  Member  States  where  no  national 
framework  exists,  investors  are  precluded  from  investing  in  a  pooled  vehicle  that  provides 
access to long-term investments.  

In  the  absence  of  a  common  framework  for  pooled  investments  targeting  long  term  assets, 
national  frameworks  have  either  been  absent  or  have  developed  different  approaches  to 
establishing rules for investor protection for funds targeting long term assets, leading to such 
funds possessing very different profiles and characteristics.  

For example, some structures have diversification rules whilst others permit a fund to invest 
into only one asset. So it is often difficult for investors to make their own risk assessment. In 
addition,  fees  can  be  opaque,  and  given  their  impact  on  the  returns,  if  they  are  not  well 
understood  they  can  undermine  confidence  in  the  whole  sector.  Indications  are  that  price 
competition is not effective with variations of up to 30%. 16  

In  some  Member  States  funds  make  extensive  use  of  leverage  to  increase  exposure  (and 
thereby their volatility and potential for gains or losses). This can change their risk and reward 
profile  significantly,  compared  with  funds  that  do  not  use  leverage  in  this  way.  Leverage, 
including by means of borrowing from banks, also creates additional risks for investors.  

In addition funds targeting long term assets can be particularly prone to conflicts of interest. 
This  might  occur  where  fund  managers  possess  an  interest  or  controlling  influence  in  an 
investment target themselves, such that they benefit from terms that are not in the best interest 

16  

Closed-ended funds that invest in long-term assets have generally high implementation costs due to the acquisition 
costs of the assets. This is balanced by the fact that annual running costs are low. See Annex 3.3 for further details 
comparing cost structures. 

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of the investors in the fund. For example, a manager of a property fund may be linked to the 
company in charge of the entity constructing or managing the long-term asset: there is a risk 
that the fund pays above market price for its stake in the project.  

Due  to  these  reasons,  investors  in  LTI  funds  have  sometimes  been  misled  as  to  expected 
returns and risks. 

As  shown    in  the  Annexes  (see  Annex  2  in  particular),  there  is  a  great  degree  of  variety  in 
national  rules  on  pooled  investment  vehicles  that  can  target  long  term  assets,  making  it 
difficult to raise productive capital across the EU. The Alternative Investment Fund Managers 
Directive (AIFMD) will not remove these national frameworks in their entirety, as it focuses 
exclusively on managers rather than on funds. 17 

For retail investors the market is even more fragmented.  There is no framework facilitating 
cross-border  marketing  to  retail  investors  of  non-UCITS  funds  or  funds  that  specialise  in 
long-term  asset  classes.  In  consequence,  each  host  Member  State  is  able  to  individually 
authorize marketing to such investors and may impose additional requirements to those in the 
AIFMD. This has prevented the development of a single market for retail investors that wish 
to gain exposure to long-term investment assets.18  

While  some  Member  States  have  created  a  national  market  for  pooled  investments  in  long 
term investments others have no market for this asset class at all. For example DE, FR, UK or 
NL  have  long  histories  of  funds  targeting  investments  in  long-term  assets.  In  some  markets 
the  investors  are  mostly  institutional  while  in  others  retail  investors  –  high  net  worth 
individuals,  family  offices  or  indeed  mass  retail  –  represent  the  biggest  share.19  But  the 
majority of Member States have no frameworks in pace for long-term asset classes – a fact 
which  deprives  investors  in  those  jurisdictions  from  the  investment  opportunities  that  these 
asset classes offer. A cross-border investment vehicle will often be the only 'access gate' that 
will  provide  investors  in  these  jurisdictions  the  opportunity  to  diversify  their  investment 
portfolio.     

3.1.2.  The diversity of long-term assets creates a potential for misplaced expectations from 

investors 

Investing in long-term assets entails substantial risks when these investments are not properly 
managed. The first risk is that investors do not correctly understand the nature and risks of the 
assets  they  invest  in  due  to  the  lack  of  a  harmonized  approach  to  defining  these  assets. 
Uncertainty prevails as to (1) the precise classification of assets as 'long-term' assets; (2) their 
risk and return profiles and (3) recommended holding periods. The second risk is linked to the 
characteristics of the assets, namely that they are illiquid in nature.  

Sub-driver  1:  No  homogenous  definitions  of  long-term  assets:  Long  term  assets  include 
infrastructure, participations in unlisted companies and property. Box 1 identifies investment 
targets (long-term assets), and Box 2 the means by which investments are made in these assets 
(financial  instruments).  The  duration  of  commitments  to  the  assets  by  means  of  these 

17  

18  

19  

This is despite the rights accorded by AIFMD on fund managers to market cross-border the funds they establish 
under particular national fund rules: as set out below the fragmentation of fund rules along national lines will not be 
overcome by AIFMD. 
Proposed  mutual  recognition  to  remove  obstacles  to  cross-border  investments  by  VC  funds  as  proposed  by  the 
Commission  and  endorsed  by  the  MS  in  2008  has  not  resulted  in  any  reduction  of  barriers.  See:  
http://ec.europa.eu/enterprise/policies/finance/risk-capital/venture-capital/index_en.htm 
http://ec.europa.eu/enterprise/newsroom/cf/itemdetail.cfm?item_id=2033 
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/intm/100715.pdf 
Please see Annex 2 for further details on each national market. 

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instruments  is  not  essential  to  assessing  their  long-term  nature.  Their  generally  non-
transferable and illiquid nature distinguishes them from the mass of highly liquid assets, such 
as company shares and corporate bonds, which are readily bought and sold through secondary 
markets on a short-term basis. 
Box 1: Overview of 'long term' asset classes20 

The definition of what constitutes a long-term asset is very broad, in general comprising all 
asset classes that generate steady cash returns over periods ranging from 10 to up to 50 years.  

Infrastructure: This category covers different sectors such as utilities, energy generation and 
distribution facilities, roads, bridges, airports, telecommunications, hospitals and schools. The 
infrastructure category is generally characterised by public rather than purely private uses and 
impacts that such assets can have, reflecting the high level of positive externalities they can 
create.  For  the  purpose  of  portfolio  allocation,  infrastructure  projects  are  usually  divided  in 
two  distinct  categories:  (1)  "greenfield  projects",  that  is  new  infrastructure  projects  and  (2) 
"brownfield projects" which represent more mature and already operational infrastructure. To 
lead an infrastructure project, consortiums or special purpose entities are created for the life of 
the  project.  Investors,  such  as  investment  funds,  take  participations  in  these  entities. 
Participation  in  infrastructure  projects  can  be  achieved  through  different  ways  such  as 
acquiring a participation in the form of equity or by granting different types of  loans to the 
project.  These  investments  are  intrinsically  long  term  because  the  life  cycle  of  an 
infrastructure project lasts over many years or decades. Some brownfield investments may be 
open-ended in duration. 

Asset  managers  already  active  in  this  area  are  heavily  focused  on  utilities  and  transport 
infrastructure.  Utilities  are  popular  on  account  of  their  government-controlled  revenues  and 
infrastructure is seen as an attractive asset when the government guarantees a certain level of 
income (e.g., an airport where government guarantees a minimum concession income to the 
operator).  

Another  popular  asset  class  are  PFI-PPPs  where  the  Government  promises  a  certain 
guaranteed level of return (PFI stands for public financing initiatives).  

New  investment  commitments  to  infrastructure  via  unlisted  funds,  for  instance,  have  been 
estimated at about $60 billion (roughly €46 billion at current exchange rates) over the period 
of 2004 to 2013.21 

SMEs  and  larger  companies:  Unlisted  companies  do  not  always  have  the  size  or  structure 
needed to gain access to public financing, such as issuing shares on a listed market or issuing 
bonds. These companies often rely on private financing, provided for example through debt or 
equity  participations,  via  private  equity  or  venture  capital  funds  or  via  fund-of-funds. 
Depending on the business cycle in which the company is operating (seed stage, start-up or 
more mature stage) investment characteristics change. Investment horizons are often around 
10  years,  reflecting  the  time  needed  for  due  diligence  prior  to  investing,  for  launching 
development projects and for selling the participation at the end of the investment period, for 
instance by listing the company through a public offering. 

Managers  operating  private  equity  or  venture  capital  funds  have  considerable  experience  as 
active  owners  that,  in  addition  to  financial  backing  also  exert  a  degree  of  governance  and 
oversight  as  well  as  provide  skills,  management  expertise  and  network  for  the  underlying 

20  
21  

See Annex 4 for details on each asset class, concrete examples and precise figures. 
FTfm 11 Feb, 2013, p. 12. Brookfield Investment Management estimates of listed infrastructure market. See Annex 
3. 

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companies.  Such  managers  invest  either  directly,  or  via  funds-of-funds  that  enable  larger 
institutional  and  long-term  investors  to  access  small  venture  capital  funds  backing  smaller 
companies. 

Around  €500  billion  has  been  raised  between  2002  and  2011  in  the  private  equity  sector, 
while €45.5 billion was raised in 2012. (Source: EVCA annual yearbook). This compares to 
net inflows of €201 billion into UCITS funds (Source: EFAMA, Quarterly Statistical Release, 
No 52).  

Property:  This  category  represents  investment  in  immovable  property  such  as  land,  office 
buildings,  private  housing  or  social  housing.  These  assets  require  high  investments  at  the 
beginning which are reimbursed over an extended period of time, for instance through rental 
income.  For  this  reason,  they  need  long  term  investments  to  cope  with  their  particular  life 
cycle as well as with their illiquid nature. 

Estimates  of  the  size  of  the  EU  property fund  market  range  between  €120  billion  and  €300 
billion. 

Other assets: Other long term assets include the financing of certain goods, such as maritime 
financing and airplane financing. Due to the large amounts of capital required to buy ships or 
airplanes,  companies  often  use  external  financing  to  avoid  placing  these  assets  on  their 
balance sheets.  

The  size  of  this  market  is  difficult  to  estimate  due  to  the  lack  of  data.  Ship  funds  that  are 
popular in Germany can be used as an example: they represent a size of around €50 billion. 
(Source: VGF Branchenzahlen 2012) 

Box 2: Types of financial instruments used to gain exposure to long-term assets 

Equity or quasi-equity participations: Investors acquire a share of the capital of the investment 
target. It can represent a share in an infrastructure project (in the consortium developing the 
project),  a  share  in  an  unlisted  company  or  a  share  in  a  company  in  charge  of  building 
properties.  Shareholders  are  entitled  to  receive  dividends  from  their  equity  participation. 
These need long term commitment because the shares are not listed on a liquid market. They 
can take hybrid forms that include debt elements. 

Debt:  Investors  can  provide  debt  facilities  (bonds,  project  bonds  or  loans)  to  the  target 
investments  identified  above.  Loans  are  generally  the  instrument  used  for  providing  private 
debt  facilities.  They  represent  an  essential  part  in  the  financing  mix  for  companies.  Usually 
provided  by  banks,  loans  can  also  be  provided  through  other  sources,  such  as  funds.  In 
contrast  to  bonds  that  are  listed  and  transferable  securities,  loans  are  issued  in  private 
placements and do not benefit from liquid secondary markets. Again, investing in loans of this 
nature requires long term commitment, usually until the loan matures. Bonds are generally the 
preferred financing instruments of the companies that are large enough to have a direct access 
to the financial markets whereas loans are the preferred instruments of the companies that are 
too  small,  such  as  the  SMEs,  to  obtain  direct  access  to  the  financial  markets.  Bonds  are 
subscribed  by  multiple  buyers  whereas  loans  are  normally  contracted  between  the  borrower 
and the lender, being a bank or a fund, bilaterally.  

Investments in long term assets can offer different risk and return profiles, depending on how 
the investment is structured. For example investments in infrastructure can be done indirectly, 
such as buying shares of investment funds or shares of companies involved in the sector, or in 
a direct way by acquiring a direct participation in a new or in a mature infrastructure project. 
Greenfield  infrastructure  is  generally  considered  more  risky  than  brownfield  infrastructure 

EN 

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(greenfield infrastructure entails constructions risk, risk of obtaining the requisite permits and 
changes in the regulatory environment). In general, long term assets offer access to relatively 
strong  yields  over  their  lifetime,  following  initial  development  phases.  The  yields  are  also 
backed by real assets.22 

The  absence  of  a  clear  regulatory  definition  has  led  market  participants  to  define  various 
different categories for such assets, with approaches also varying across national markets. The 
terminology  used  for  long  term  assets  is  complex,  contradictory  and  fragmented23.  This,  in 
turn,  leads  to  a  lack  of  comparability  between  investment  propositions  and  a  lack  of 
transparency on essential characteristics of long-term investments, undermining investor trust 
and  comprehension,  and  leading  to  mis-allocations  of  resources.  The  tables  contained  in 
Annex 2 reveal that each of the 9 countries that are referenced have several fund frameworks 
for offering access to the real estate assets or the private equity and venture capital assets. For 
example, only for investing in real estate assets Luxembourg has 5 different funds, France 4 
and  Germany  3.  The  proliferation  of  different  fund  frameworks  make  difficult  for  the 
investors to select the appropriate fund in their own Member State and almost impossible to 
select the appropriate fund framework across borders. This choice is even more difficult for 
the  retail  investors  that  lack  the  knowledge  and  resources  to  investigate  the  different  legal 
frameworks in a language that is not necessarily customary to them. 

Sub-driver  2:  The  liquidity  profiles  of  long  term  assets  are  idiosyncratic:  Long-term 
assets  are  mostly  illiquid  because  they  are  not  traded  on  secondary  markets.  The  value  of 
assets  reflects  the  cash  flows  and  residual  capital  values  investors  anticipate  for  a  given 
holding period. Unlike liquid assets, their market values do not offer a ready and transparent 
short-term valuation, such that asset valuation is a key challenge for investors.  

Not  all  forms  of  participation  in  long-term  assets  show  the  same  level  of  illiquidity,  for 
example  equity  participations  in  infrastructure  projects  tend  to  be  the  less  liquid  than  loans 
provided  to  companies  (where  occasionally  a  secondary  market  might  exist).  Liquidity  can 
correlate with the age of assets and transparency: assets that have clearly demonstrated a good 
income stream are generally more liquid than new assets with no track record. 

Taking infrastructure as a case study, long term assets and the funds investing in them can be 
classified  according  to  their  liquidity  profile  (higher  or  lower),  focus  (on  a  few  or  many 
projects) and time lines on investments (very long term, or medium term).  

22  

23  

There  are  also  strong  differences  between  types  of  greenfield  infrastructure.  As  one  stakeholder  put  it,  power 
stations are more risky than social infrastructure, such as schools or hospitals. See Annex 3 for more detail. 
For example, real estate funds in Germany include categories such as residential real estate, commercial 
real  estate,  un-developed  real  property  whereas  in  France  the  real  estate  funds  define  the  eligible 
properties as the ones that are acquired for the purpose of leasing them. 

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>20 years 

Between 10 and 20 years 

New transport infrastructure 

Motorways, tramlines, airports 

High liquidity 
risk 

New property and utility 
infrastructure 

Hospitals, social housing, 
medical centres, waste 
treatment 

Focus on a limited 
number of projects 

Operational infrastructure 

Infrastructure technology 

Some liquidity  

Participations in existing 
infrastructure (transport or 
communications infrastructure) 

Tunnelling technologies, 
waste treatment 

More 
diversification  

High  liquidity  risk  =  Projects  that  are  complex  to  administer,  in  terms  of  cost,  cost  overruns,  budgets  and 
deadlines. Some liquidity = stable returns  
Source: Ernst & Young, submission on LTI  

For  all  of  these  assets,  even  where  a  secondary  market  exists  or  there  is  some  potential 
liquidity, it can still be difficult or impossible for an investor to divest themselves (at a price 
of their choice) of their commitment prior to maturity. 

The illiquidity of assets forces investors to adopt a long-term investment strategy. Therefore, 
‘closed-ended’ funds are the common vehicle to provide the tool for pooling investments into 
such assets. These funds do not buy and sell assets as investors enter or exit the fund, but are 
normally closed to redemptions for their entire life; they collectively manage the investments 
for  investors  and  provide  them  with  regular  cash  flows.  Capital  commitments  are  only 
reimbursed  after  a  normally  predetermined  number  of  years.  The  fact  that  investors  do  not 
need  to  be  given  rights  to  redeem  during  the  life  of  the  fund  permits  the  fund  manager  to 
invest in long-term assets that are illiquid.24 

There is a risk that investors are misinformed about the lack of redemption rights at the level 
of  the  fund,  or  secondary  markets  made  available  for  selling  investments  turn  out  to  be 
themselves illiquid. Spreads in the secondary market would grow very wide. There is a risk 
also that distributors sell investments on the basis that the distributor themselves will provide 
liquidity (at a price) for those wishing to leave, yet the scale of those wishing to leave (on the 
basis of the promises of the distributor) leaves the distributor unable to support the requests. 
Another problem can be that the maturity of funds might, on occasion, need to be extended 
without investors having the option to disinvest.  

Open-ended funds, which offer regular redemption options and which normally do not have a 
finite life, have sometimes been used in some cases for investing into long term assets. These 
funds tend to be popular in the property market. But with this kind of fund, there is a risk that 
the liquidity of the assets will be too low to support the redemption rights offered to investors 
on  a  regular  basis.  An  open-ended  fund  may  therefore  need  to  suspend  redemptions.25 

24  

25  

On  the  other  hand,  units  or  shares  in  a  closed-ended  fund  may  benefit  from  a  secondary  market, 
meaning that investors may  exchange the units of the fund between themselves. This form of trading 
does not, however, guarantee daily liquidity because when the fund performs badly or during stressed 
market  situations,  the  secondary  market  has  a  tendency  to  freeze,  forcing  the  investors  to  remain 
invested.  
See Annex 3.2 for a concrete example 

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Investors  are  then  forced  to  remain  invested  even  where  they  formed  the  appropriate 
expectation – given the fund is open-ended -- that they would be able to redeem. 

3.2. 

Problems 

3.2.1. 

Inefficient market for pooled investments impedes access to finance  

In  the  EU,  banks  represent  the  biggest  provider  of  funding  to  the  economy,  marginally 
complemented by financing coming from other sources such as capital markets. According to 
recent data published by the Economist, US bank financing (as opposed to financing via the 
bond  markets,  and  so  by  investment  funds)  represents  under  30%  of  total  financing  as  of 
2011; for the UK and the Eurozone, the figures are about 70% and almost 90% respectively.26  

There are 21 million SMEs in Europe, which represent the backbone of the EU economy, and 
which  rely  heavily  on  bank  financing  which  is  still  by  far  the  most  relevant  source  of 
financing for them.27 European banks hold €8 trillion of corporate debt on their balance-sheets 
(by  comparison  only  €1.3  trillion  of  such  debt  is  in  the  bond  markets,  which  would  be  a 
conduit for investments via funds).28  

A variety of factors, following on from and accelerated by the crisis, have deepened the focus 
of private financing on shorter-term commitments. According to stakeholders, many projects 
have  not  been  able  to  raise  financing  suited  to  their  time  horizons,  and  have  instead  had  to 
resort to short term financing structures (5 to 7 years maturity), solely covering construction 
and initial commissioning of the projects.  

For  example,  infrastructure  operators  such  as  Veolia  underline  the  lack  of  financing 
instruments  which  take  into  account  the  construction  phase  and  its  associated  operational 
risks. Moreover they point out that there is no financing that appears adapted to the needs of 
small and medium-sized projects. For such projects, for instance environmental projects that 
commonly fall under €100 million, project bonds are too expensive to put in place. 

This  is  in  the  context  of  a  global  listed  infrastructure  market  (e.g.  shares  in  utilities  and 
transport  companies)  estimated  at  about  $1  trillion  (approx.  €770  billion),  with  potential  to 
reach  $5  trillion  (approx.  €3.8  trillion)  within  5  years.  Estimates  of  funding  gaps  are 
potentially huge; a recent UK assessment put the national ‘gap’ (for private firms) at almost 
£200  billion  (approx.  €240  billion)  by  2016.29  The  UK  is  a  market  that  is  already  less 
dependent on bank financing than many markets in continental Europe. 

Market  participants  expect  a  shift  to  other  sources  of  funding.  “The  direction  of  travel  in 
Europe is clear: the incremental replacement of banks by the capital markets,” says an analyst 
at  Barclays.30However,  the  problems  identified  threaten  the  capacity  of  investment  funds 
(pooling capital market investments) to fulfill their potential.  

Weaknesses  in  the  EU  market  for  pooled  investment  vehicles  cannot  be  addressed  by  other 
capital  sources.  According  to  Macquarie  Renaissance  Infrastructure  Fund,  the  key  ‘added 

26  

27  

28  

29  
30  

http://www.economist.com/news/briefing/21568365-europes-banks-are-shrinking-what-will-take-their-place-
filling-bank-shaped-hole 
SMEs  are  currently  struggling  to  access  bank  financing.  According  to  the  latest  ECB  bank  lending  survey 
published in January 2013, the tightening of credit standards by euro area banks for loans to enterprises has been 
broadly  stable  in  the  fourth  quarter  2012  and  banks  expect  a  similar  degree  of  net  tightening  for  first  quarter  of 
2013 http://www.ecb.int/stats/money/surveys/lend/html/index.en.html. 
http://www.economist.com/news/briefing/21568365-europes-banks-are-shrinking-what-will-take-their-place-
filling-bank-shaped-hole 
UK report: FTfm Nov 5, 2012, p. 22. 
http://www.economist.com/news/briefing/21568365-europes-banks-are-shrinking-what-will-take-their-place-
filling-bank-shaped-hole 

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value’ of the fund model is that it allows investors to support projects indirectly that would be 
impossible  for  them  directly.31  Without  funds  performing  this  intermediation  role,  capital 
market funding is unlikely to fulfil its potential.  

Costs  and  burdens  for  those  seeking  to  invest  in  long  term  assets  therefore  rise.  Such  costs 
include preparing information and data for potential investors, search costs related to finding 
potential  investors,  and  structural  costs  in  establishing  corporate  forms  that  are  capable  of 
attracting investment. The ability to perform important activities and functions are dependent 
on a wider range of counterparties. The under-developed nature of the LTI fund market also 
reduces the effectiveness of the LTI market more widely. Expertise is more dispersed or less 
visible, and therefore more costly. Service providers – legal, administrative, economic – are 
underdeveloped. Fund markets are key drivers for the development of other ancillary services, 
and the under-development of these has a deeper and wider effect. 

3.2.2.  Potential  investors  in  long-term  assets  are  currently  deprived  of  an  appropriate 

investment vehicle 

Smaller institutional investors (typically smaller pension or retirement schemes, for example 
as may be set up by the liberal professions, certain smaller insurance undertakings, charities, 
foundations or municipalities) are neither able nor willing to invest in long-term asset classes 
directly. 

Mid-size  pension  schemes  with  assets  ranging  from  €100  million  to  €1.5  billion  are  often 
administered  by  a  trustee  or  very  small  staff  that  lack  the  specific  expertise  to  select 
appropriate long-term assets, assess their future revenue potential and analyse their downside 
in  terms  of  risk  (risk  of  completion,  risk  of  change  in  the  regulatory  or  public  policy 
environment  that  governs  the  asset).  On  the  other  hand,  the  overall  capital  requirements  for 
many  long-term  projects  will  be  too  great  for  even  the  largest  of  individual  participants  to 
bear in isolation. For mid-sized pension schemes or other investors managing investments of 
comparable  volume  the  use  of  investment  funds  to  pool  smaller  stakes  and  diversify 
investments across different projects is a precondition to investing in long term assets.  

However, the absence of a single identifiable model for LTI funds across the EU undermines 
the  visibility  of  such  funds.  This  prevents  the  emergence  of  economies  of  scale  in  the  LTI 
funding  sector,  and  reduces  their  visibility  in  the  market.  In  addition,  costs  are  raised, 
reducing the broad attractiveness of these funds for smaller investors.  National regimes can 
offer access to all sorts of assets, but these may have been designed for other more specific 
purposes, such that there are no pooling schemes dedicated to the range of long term assets as 
set out in this impact assessment.  

For  instance  some  institutional  investors  have  highlighted  gaps  in  the  supply  of  national 
opportunities  to  invest,  notably  in  relation  to  infrastructure  funds.  The  absence  of  clear 
common  criteria  setting  out  the  eligibility  of  investments  in  private  equity,  property  or 
infrastructure  represents  an  additional  burden  for  institutional  investors.  In  the  absence  of 
cost-effective LTI funds, institutional investors will have to arrange such investments directly. 
This  is  more  costly,  limiting  up-take.  Each  investor  will  need  to  obtain  in-house  or  buy  in 
external expertise in the area of long term assets targeted, and undertake costly due diligence 
and on-going monitoring and support for these investments. Economies of scale are difficult 
to achieve, and benefits of diversification are either not available or entail additional costs or 
lower  overall  yields.  This  problem  is  particularly  acute  for  pension  funds  and  insurance 

31  

http://www.gfmag.com/archives/146-january-2012/11566-special-report-infrastructure-
finance.html#axzz2LXvBrN7n 

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companies,  which  are  major  users  of  investment  funds.  Funds  backed  by  long  term  assets 
could  be  particularly  attractive  to  such  investors:  long-term  assets  have  the  ability  to  create 
steady  income  streams  backed  by  real  economy  assets  that  are  well  suited  to  matching  the 
long term liabilities such investors face.  

Box 3: Financial intermediaries are key in channelling investments into long-term asset 
classes  

According  to  the  ECB  Monthly  Bulletin  of  November  2011,  the  Euro  area  pension  funds 
invest around 41% of their €1,420 billion of assets in investment funds whereas only 2.7% is 
directly  invested  in  non-financial  assets,  which  can  be  assimilated  to  the  long  term  asset 
classes  described  above.  Insurance  undertakings  invest  17.7%  of  their  €5,664.7  billion  of 
assets  in  investment  funds  whereas  2%  is  directly  invested  in  non-financial  assets.  These 
figures show the importance of investment funds for institutional investors’ attempts to gain 
exposure  to  wider  asset  classes;  direct  investment  in  non-financial  assets  represents  only  a 
tiny  proportion  of  their  portfolios  in  comparison.  Tackling  the  under-representation  of  long 
term  investments  within  the  investments  funds  that  make  up  investment  portfolios  of 
institutional investors is a key lever. 

Mis-selling  of  long-term  assets  could  further  undermine  take-up  of  this  asset  class.  This 
problem  is  particularly  acute  for  retail  investors  who  can  lose  confidence  very  rapidly, 
triggering  runs,  should  investment  expectations  not  materialize.  This  is  despite  the  fact  that 
the long-term assets can represent an interesting investment opportunity for retail investors as 
well. The usual low correlation of the long-term asset class with the traditional assets makes 
this  investment  attractive  for  diversifying  the  portfolio.  For  the  retail  investors  seeking  to 
invest  for  the  long-term,  they  have  traditionally  the  choice  to  invest  in  funds  investing  in 
stocks and bonds but with a long-term strategy, in long-term insurance products or simply in 
long-term cash deposits. Only in a few Member States do retail investors have the opportunity 
to gain access to long-term assets. As revealed in the box in the section 6.1.6, where the retail 
investors  have  access  to  funds  offering  exposure  to  long-term  assets,  they  usually  represent 
one  of  the  largest  investor  categories.  The  cross-border  dimension  is,  at  this  stage,  not  very 
developed. Most retail version of long-term investment funds are sold domestically under the 
investment laws of that specific Member State. This is mainly explained by the proliferation 
of fund frameworks in each Member State as described in sub-driver 1.  

Even if this is difficult to assess the possible cross border retail dimension ex-ante, one could 
however  estimate  the  possible  cross-border  dimension  that  could  be  reached  by  making  a 
parallel with the UCITS framework where 20% of the assets under management result from 
cross-border marketing. This bulk of this cross-border flow, as with the earlier UCITS model, 
is  expected  to  be  constituted  mostly  of  investors  from  jurisdictions  that  have  currently  no 
long-term investment fund framework in place. But retail investors that already benefit from 
national regimes might also be attracted by investment propositions linked to long-term assets 
of other Member States. In foreign assets, the foreign fund’s managers have a higher expertise 
than the domestic fund’s managers; therefore the cross-border access is essential. Contrary to 
stocks  and  bonds  that  tend  to  be  highly  correlated  between  Member  States,  the  long-term 
assets  are  often  link  to  local  characteristics  that  render  their  return  and  risk  profile  unique. 
This  could  make  foreign  assets  and  thus  foreign  funds  particularly  attractive  for 
diversification reasons. 

For  all  the  above  reasons  the  long-term  asset  class,  while  seen  as  a  valuable  and  important 
asset class, remains broadly inaccessible to smaller institutional and to retail investors. This is 
despite  the  fact  that  LTI  funds,  properly  regulated  and  construed,  may  provide  many 
advantages to investors: stable income and capital returns that have the potential together to 

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beat inflation, and which are broadly uncorrelated with listed equity and securities traded on 
listed markets. For example: 

•  From  1990-2004  annualised  real  estate  performance  of  12.71%  beat  the  S&P  500 

(equity index) at 10.94% and the typical bond index at 7.70%.32  

•  For  long  term  (20  year)  venture  capital  funds  in  the  US,  annualised  returns  were 
16.5%, long term (20 year) private equity funds had returns of 13.3%, compared to the 
S&P  500  at  11.2%.33  In  2011,  the  French  private  equity  sector  achieved  an  annual 
performance of 8.5% over the last 10 years while the reference equity index achieved 
an annual return of 2.7%34. 

•  Long  term  assets  have  lower  volatility  compared  to  equities:  for  instance,  the 
annualised  standard  deviation  in  asset  values  (a  measure  of  volatility)  for  real  estate 
from 1990-2004 was 12.74%, compared to 14.65% for the S&P 500.35  

• 

In  general,  infrastructure  investments  provide  a  good  means  for  achieving  higher 
returns  than  the  base  interest  rate.  In  average,  an  investor  that  invests  in  an 
infrastructure fund can expect a return of around 2.75%/3.00% above the base interest 
rate.36 

The positive aspects of an investment in long-term assets should also be assessed against the 
risks that they carry. As traditional investments in stocks and bonds, the risk to lose the entire 
capital is present. This is for example the case when a venture capital investment in a SME is 
valued at zero because that SME went bankrupt. What distinguishes the long-term assets to 
the other assets is their illiquidity risk. Contrary to stocks and bonds which can normally be 
easily  sold,  long-term  assets  do  not  benefit  from  liquid  secondary  markets  and  it  often 
requires months or years to be able to sell such an asset. 

3.2.3.  Managers face barriers to activity, costs and reduced economies of scale  

Differences in national rules and definitions of long term investment funds raise costs for the 
funds  when  they  are  marketed  cross-border.  AIFMD  provides  for  a  right  to  market  to 
institutional  investors,  which  will  reduce  costs  associated  with  conforming  to  national  rules 
for  institutional  funds.  However,  costs  related  to  fragmentation  of  national  markets  remain. 
Fund managers may find it easier to access investors in different Member States by forming 
different funds in each target Member States, with attendant establishment costs. Funds will 
be smaller, and thereby proportionately more expensive to run. 

Access to retail clients situated across borders requires the fund to adapt to national rules in 
the  host  member  state,  as  there  is  no  right  to  market  cross-border  as  such  (except  on  a 
reciprocal  basis  where  a  Member  State  permits  such  marketing  nationally)  to  retail  clients 
under the AIFMD. As there is no retail ‘fund passport’ as such there is therefore expected to 
be very little cross-border activity of this kind.  

Box 4: Infrastructure funds in the EU operate on a small scale 

32  
33  
34  
35  
36  

Source: CISDM (2005), via CFA. 
Source: NVCA and Thomson Venture Economics 4 Feb 2004, news release, via CFA. 
« Performance nette des acteurs français du capital investissement à fin 2011 », Ernst & Young 
Source: CISDM (2005), via CFA. 
Source: “The role of infrastructure within a long term investment portfolio”, BlackRock  

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A  study  by  Preqin37  compares  unlisted  debt  fundraising  for  infrastructure  by  manager 
location. In 2012, 22 funds raised $14.4 billion in North America while only 12 funds raised 
$7.7 billion in Europe. The financial crisis has amplified the gap since fundraising in Europe 
for  long-term  assets  has  declined  to  the  levels  last  seen  in  2005.38  This  difference  is  also 
present in private equity funds: of the total number of funds currently seeking capital in the 
world, 23% are in Europe, 44% in the US and 32% in Asia and the rest of the world39. 

3.3. 

Consequences of the problems 

Despite all the efforts that have been undertaken to create a single market in the area of asset 
management, the long-term asset sector will continue to be characterised by strong differences 
in national approach (as elaborated further in section 3.4).  

UCITS funds and UCITS managers already benefit from the single market, as their funds can 
be marketed throughout the EU and managers can offer their services cross-border. For non-
UCITS funds (28% of the sector) the AIFMD will create the same rights for the managers as 
those currently enjoyed by managers of UCITS. While an AIF manager will be able to market 
an  AIF  on  a  cross  border  basis  from  July  2013,  there  is  however  still  no  retail  product 
passport for AIFs as such, and the AIFMD does not create common definitions or labels at the 
level of specific fund types. This directly impacts funds targeting long term assets.  

In the absence of common LTI fund definition and hence a functioning single market for these 
funds,  the  contribution  of  the  deeper  pool  of  potential  capital  made  available  by  the  above 
mentioned  investor  groups  across  the  single  market  would  be  forfeited.  This  would  reduce 
funding available to LTI targets, such as schools, hospitals, transport infrastructure, but also 
the SME sector more widely.40  

Available  funding  is  likely  to  remain  geographically  restricted  or  localised:  bigger,  more 
developed  Member  States  with  strong  financing  models  will  predominate;  peripheral  or 
smaller  economies  could  suffer  continued  restrictions,  worsened  further  by  restrictions  on 
bank financing as well as lack of cross-border equity either because of the small size of local 
markets or because asset classes are not developed or attractive enough. This also impacts on 
the variety and thereby the resilience of funding. Larger, more developed member states have 
more varied and resilient models. Problems with investments into long term investment funds 
mean EU-wide pools of capital are more weakly mobilised, harming growth.  

3.4. 

How would the problem evolve without EU action? The baseline scenario 

If no action is taken to create a legislative framework applicable to long term assets, it is very 
likely that the problems that have been identified will persist.  

The  application  of  AIFMD  from  July  2013  can  be  expected  to  improve  the  marketing  of  a 
wide range of well-known AIF categories cross-border. The AIFMD establishes a basis for a 
single  market  for  AIFs  directed  to  professional  investors  –  by  harmonising  operating 
conditions and other measures relating to AIFMs and providing a procedure for a passport for 
marketing AIFs by these AIFMs. However the AIFMD does not harmonise the definition and 
product  rules  for  AIFs  as  such,  as  it  is  focused  on  the  rules  applying  to  the  AIFMs.  As  a 
result, the single market created by the AIFMD can be expected to benefit those AIF models 
that are already well understood cross-border or where detailed national regimes have not yet 

37  

38  
39  
40  

EN 

2013 

Preqin  Global 

Infrastructure  Report, 

The 
http://www.preqin.com/docs/samples/The_2013_Preqin_Global_Infrastructure_Report_Sample_Pages.pdf?rnd=1] 
http://mediacommun.ca-cib.com/sitegenic/medias/DOC/15951/2012-01-26-agefi-detteinfra.pdf 
“Preqin Special Report: European Private Equity”, March 2012 
See section 7.5 below. 

domain, 

public 

23. 

the 

[In 

p. 

see,  

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developed.  For  instance  hedge  funds  and  certain  well-established  private  equity  models 
(leveraged buy-out funds) might be expected to be prime beneficiaries of an AIFMD passport. 
Those  fund  models  where  there  is  already  fragmentation  in  detailed  national  rules  can  be 
expected to benefit less from the AIFMD, since this fragmentation is likely to persist.  

Since there is no EU-wide consistency in defining funds targeting long term investments, and 
no clear consistency as to the essential features of long-term asset classes, the risk and return 
profile  that  a  fund  vehicle  specialising  in  such  assets  should  be  targeting,  long-term  fund 
managers  encounter  difficulties  in  practice  accessing  non-domestic  investors.  These  fund 
managers must, as noted, determine their funds according to the variant national fund models. 
Domestic investors usually know and trust their own national fund regimes and it cannot be 
assumed that they will readily invest in fund structures regulated under foreign rules and by 
foreign  supervisors.  Given  the  widely  differing  national  fund  frameworks  that  apply  across 
the  LTI  fund  area,  as  set  out  in  the  Annex,  managers  may  be  less  inclined  to  market  such 
funds cross-border, and managing such funds cross-border would raise costs for managers in 
familiarising  themselves  with  varying  national  fund  rules.  Fragmentation  would  therefore 
likely persist. 

Other  measures  that  are  shortly  to  come  into  force  will  also  be  unlikely  to  transform  this 
picture.  The  EuVECA  Regulation41  will  improve  the  functioning  of  the  single  market  for 
Venture  Capital  funds.  However,  it  is  limited  in  scope  to  smaller  fund  managers  and  so  is 
unlikely  to  be  strong  interest  to  those  operating  LTI  funds  that  seek  participations  in  large 
scale  projects,  such  as  infrastructure.  In  addition,  the  EuVECA  Regulation  is  focused  on 
providing risk capital (equity) to SMEs during their start-up phase, ruling out investments in 
other companies, real assets or projects that do not take a SME form, or support through other 
instruments such as loans. 

Given this, even for institutional investors, current or shortly to apply rules can be expected to 
be insufficient to drive convergence in models and access to them. It is unlikely that the EU 
fund  market  will  overcome  its  fragmentation  in  relation  to  LTI  funds,  particularly  given  a 
preference  for  many  investors  for  highly-regulated  (retail)  funds,  since  non-UCITS  highly-
regulated  funds  are  the  most  fragmented.  Because  of  differences  in  national  rules,  costs  for 
funds operating cross border are likely to remain significant under AIFMD. 

Retail markets are likely to remain wholly national, given the discretion AIFMD provides for 
divergent national rules in this area, with little cross-border activity. This limits the potential 
for  competition  as  LTI  funds  can  be  blocked  from  accessing  retail  investor  bases  in  other 
Member States. Investors’ choice, especially retail, is also reduced with  the  consequence of 
mis-selling  practices,  inefficient  portfolio  allocations,  increased  risks  and  costs.  Experience 
with  UCITS  and  with  the  existing  non-UCITS  national  frameworks  suggests  convergence 
between  Member  States  to  address  these  problems  in  the  absence  of  action  at  the  EU  level 
would be unlikely. Given this, self-action by the industry would have little scope of success. 

3.5. 

EU’s right to act and justification for acting 

Legislative action on the policy options examined in this report is based on Article 114 of the 
TFEU.  The  legislative  action  to  be  examined  would  lay  down  uniform  product  rules  on 
investment funds  that are  targeting long term assets.  It aims  at  ensuring that such  funds are 
subject  to  consistent  rules  across  the  EU  and  that  they  are  identifiable  as  such  by  investors 
throughout  the  EU.  At  the  same  time  it  also  aims  at  ensuring  a  level  playing  field  between 

41  

See REGULATION (EU) No 345/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 
April 2013 on European venture capital funds. 

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different  long  term  investment  fund  managers.  It  aims  therefore  at  establishing  uniform 
conditions for the operation of such funds. This proposal therefore harmonises the operating 
conditions  for  all  relevant  players  in  the  investment  fund  market,  and  for  the  benefit  of  all 
investors. 

Different  rules  that  vary  according  to  the  national  regulation  in  this  area  create  an  un-level 
playing  field,  erecting  additional  barriers  to  a  Single  Market  in  financial  services  and 
products.  Member  States  have  already  taken  divergent  and  uncoordinated  action  to  develop 
national  fund  regulation  related  to  long  term  investment  funds,  and  it  is  likely  that  this 
development will continue, even as the marketing and management passports contained in the 
AIFMD come into force. Divergences in such rules increase costs and uncertainties for fund 
managers, distributors, and investors, and represent an impediment to the further cross-border 
development  of  the  market  for  long  term  investment  funds.  These  divergences  represent  an 
obstacle to the establishment and smooth functioning of the Single Market. Consequently, the 
appropriate legal basis is Article 114 TFEU. 

According  to  Article  4  TFEU,  EU  action  for  completing  the  internal  market  has  to  be 
appraised in the light of the subsidiarity principle set out in Article 5(3) TEU. Hence it must 
be  assessed  whether  the  objectives  of  the  proposed  action  could  not  be  achieved  by  the 
Member States alone in the framework of their national legal systems. The internal market for 
investments in long term assets by means of funds currently is fragmented due to divergent 
national  regimes.  This  fragmentation  raises  costs,  reduces  economies  of  scale,  and  reduces 
innovation and access to investment opportunities.  

Member State actions to widen funding sources and promote funds targeting long term assets 
have  operated  solely  within  the  constraints  of  national  markets.  Different  rules  that  vary 
according to the national regulation mean that funds in different national markets that target 
long term assets can be very divergent in their operating conditions and their permitted assets. 
For instance,  in  some national markets  diversification of  investments is required, while it is 
not in others. Or, the permitted investments can vary, between regimes designed for all kinds 
of assets, to those limited to certain kinds of innovative companies or infrastructure projects. 
These  variations  create  an  un-level  playing  field  for  fund  managers  depending  on  their 
location,  and  by  fragmenting  fund  models  along  national  lines  erect  additional  barriers  to  a 
Single  Market  in  financial  services  and  products.  Key  drivers  of  fragmentation  include  the 
preference  of  investors  for  familiar  or  known  investment  propositions  and  costs  associated 
with variations in marketing rules across different Member States. 

Action  by  Member  States  alone  cannot  be  expected  to  address  such  weaknesses  in  the  EU 
market  for  long  term  assets  and  funds,  even  as  the  marketing  and  management  passports 
contained in the AIFMD come into force. Actions by Member States alone can be expected 
indeed  to  deepen  divergences,  further  undermining  the  efficiency  of  EU  capital  markets  in 
providing long term investments.  

The  success  of  UCITS  indicates  the  efficacy  of  action  at  the  EU  level  in  dismantling  the 
barriers that have been erected by fragmented regulation.  The launch of UCITS Directive in 
1985  created  a  level  playing  field  for  UCITS  funds  and  ensured  effective  and  uniform 
protection for unit-holders. It shows the  strongly positive impact  of investor trust, rooted in 
the familiarity and trust that comes from uniformity of rules. The confidence that unit-holders, 
fund  managers  and  investment  targets  derive  from  a  single  legislative  framework  and 
predictable  investment  conditions  lay  down  a  solid  ground  for  a  development  of  internal 
market for funds.  

Consultation responses have shown a strong recognition of this factor and its possible impact 
by industry stakeholders. The vast majority stakeholders have endorsed the view that a market 

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for retail investors in pan-European long term funds can be readily built on the condition that 
a common framework is put in place (see, e.g., Annex 6, question 1,2). By harmonizing the 
essential  features  that  constitute  an  LTI  fund  the  proposal  aims  at  establishing  a  uniform 
framework in relation to the definition of such funds, clearly setting common rules on eligible 
investments,  an  area  not  addressed  by  the  AIFMD  which  does  not  delimit  the  potential 
investments of AIFs.  

As regards proportionality, proposals to be explored would seek to create a common product 
label for which there is a strong public interest and which would lay down a foundation for a 
common,  competitive  and  cost  efficient  market  for  LTI  funds  in  the  EU.  An  appropriate 
combination  of  parameters  suitable  for  longer  horizon  investments  and  specific  investor 
groups  can  be  designed  by  taking  full  account  of  safety  and  trust  considerations  relating  to 
any  LTI  funds  designation  or  label.  Proposals  would  therefore  not  go  beyond  what  is 
necessary to achieve a common legal framework for LTI funds. Action at the EU level would 
be more efficient than uncoordinated action at the national level. In sum, legislative action at 
the EU level is essential in fostering the growth of a pan-European market for the LTI funds. 
Definitive ptrogress cannot  be achieved by the industry, nor by Member States actingalone. 
Therefore,  it  is  necessary  for  the  EU  to  intervene  and  facilitate  the  creation  of  an  effective 
internal  market  for  LTIFs  where  they  can  be  easily  marketed  and  accessible  to  all  types  of 
investors.  The  measures  proposed  to  achieve  that  aim  at  complying  with  the  principles  of 
subsidiarity and proportionality.  

4. 

OBJECTIVES  

Operational objectives 

1. 

Increase the assets under management in the long-term asset sector, including cross 
border 

2.  Reduce the number of mis-selling cases 

Specific objective 1 

Specific objective 2 

Specific objective  

Enhance economies of 
scale for managers of LTI 
funds 

Increase the choice and 
increase the protection for 
investors interested in 
LTI funds

Increase investment flows 
for long-term assets 

General objectives 

1. 

Improve the longer term financing of the European economy 

2.  Remove the barriers in the single market 

In light of the analysis of the risks and problems above, the general objectives are to: 

(1) Improve the longer term financing of the European economy 

(2) Remove the barriers in the single market 

Reaching this general objective requires the attainment of the following more specific policy 
objectives: 

(1) Enhance economies of scale for managers of LTI funds 

(2) Increase the choice and protection for investors interested in LTI funds 

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(3) Increase investment flows into assets with long term horizons 

The  specific  objectives  listed  above  require  the  attainment  of  the  following  operational 
objectives: 

(1) Increase the assets under management in the long-term asset sector, including cross border 

(2) Reduce the number of mis-selling cases 

Identified  options  have  been  selected  on  the  basis  of  their  capacity  to  address  these 
operational objectives, and will be assessed in the light of the specific and general objectives 
outlined here. 

5. 

POLICY OPTIONS 

5.1. 

Identification of options  

Seven main options for addressing these objectives have been identified, from no action at EU 
level  to  the  creation  of  a  dedicated  fund  framework.  Option  2  represents  a  “light  touch” 
approach by introducing a label whereas option 3 builds on the existing framework. Options 4 
to  7  entail  the  creation  of  a  new  European  fund  framework  dedicated  to  long-term  assets. 
Whereas options 4 and 5 consider the merits of opening the fund to professional or wealthy 
investors only, options 6 and 7 explore the opportunity to expand the investor base to include 
retail investors. The potential product rules are assessed against their general effectiveness but 
also against the chosen investor base, being professional only or including all investors.  

Policy options 

Summary of policy options 

1 No action 

2 LTI fund Label 

Use  soft  law  to  develop  an  LTI 
label, no passport 

3 Long term assets in UCITS 

Allow UCITS some exposure to 
long term assets  

Take no action at EU level. 

Achieve  greater  convergence  in  the  definition  and  labelling  of  funds 
targeting long term assets. Soft law instruments could seek to achieve 
convergence  in  what  long  term  assets  are  and  a  label  for  funds 
investing  in  such  assets,  subject  to  self-regulation, or  policy  guidance 
to be issued by ESMA. A Recommendation, for instance, could set the 
criteria  attached  to  the  definition  of  long  term  assets  and  the  funds 
targeting them. ESMA could be mandated to compile a list of all assets 
that are considered to be of a long term nature. This could enhance the 
coherence of the LTI market by avoiding different marketing practices 
around these long term assets.  

Amend  UCITS  rules  to  allow  investments  into  long  term  assets  by 
allowing UCITS to invest up to a certain proportion of their portfolio 
into non-transferable securities that do not comply with the eligibility 
rules of the directive.42 This option would entail that a proportion (e.g., 
10%)  of  a  UCITS  portfolio  could  comprise  financial  instruments  that 
are not transferable or where secondary markets are illiquid. A UCITS 
could  gain  direct  exposure  to  long  term  assets,  such  as  loans, 
participations in infrastructure projects, building infrastructure assets or 
shares  of  unlisted  companies.  A  precise  definition  of  each  asset  class 
that  would  be  eligible  would  be  provided  together  with  criteria  to 
identify and circumscribe these assets.43  

4 LTI fund for institutional 

Under this option, a new fund, the LTI fund, would be created with a 

42   
43  

Article 50(2)(a) of directive 2009/65/EC 
For a precise analysis of each long term asset class, please refer to Annex 4. This annex analyses the rationale for 
including  the  assets  in  the  scope  of  the  eligible  assets  or not.  This  analysis  is  valid  for  all  options  of  this  report 
aimed at introducing a new set of eligible assets. 

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investors 

Establish a common framework for 
LTI AIFs  

5 LTI fund for institutional 
investors and HNWI 

Establish a common framework for 
LTI AIFs and introduce an entry 
ticket 

6 LTI fund retail passport with 
no redemptions 

Establish common product rules 
and designation for LTI, and permit 
marketing to retail investors with 
no redemption rights 

distinct set of portfolio rules relating to the classes of long term assets 
that are eligible for investments by the new "LTIF AIFs".  

Based on the model that exists in the UCITS Directive, the eligibility 
rules  would  cover  non-transferable  instruments  such  as  participations 
in infrastructure projects, property or in non-listed companies. The key 
criterion for eligibility would be that the instruments finance long term 
projects as identified above (Box 1). Definitions will also be provided 
for identifying what are the eligible instruments for investing in SMEs 
and larger companies, in properties and in other long-term assets.  

The target investors would be defined through the existing framework 
of the AIFMD, and therefore will be institutional investors. To match 
the  long-term  nature  of  the  assets  with  the  commitment  of  the  fund 
investors, there would be no redemption rights. 

The same as option 4, but the LTI funds would be open to an additional 
layer of investors, the so-called "high net worth individuals" (HNWI). 
Through  the  introduction  of  a  minimum  entry  ticket  set  at  €100,000 
HNWI will have direct access to the LTI fund. 

The  LTI  funds  would  be  open  to  all  investors,  including  retail 
investors. This would entail stronger investor protection requirements. 
As  compared  with  options  4  and  5,  the  retail  focus  would  require 
greater  use  of  risk  mitigation  techniques.  To  match  the  long-term 
nature of the assets, there would be no redemption rights. Transparency 
requirements would be enhanced to reflect the needs of retail investors, 
for example by introducing extensive cost disclosures.. 

7 LTI fund retail passport with 
redemptions 

The same as option 6, but including regular redemption rights, after an 
initial lock-in, for example for three years.  

Establish common product rules 
and designation for LTI, and permit 
marketing to retail investors with 
redemption rights 

Important  caveat:  Compliance  with  all product  rules  set out  in Options 3  to  7 would be  mandatory  for  a fund 
manager seeking to market a fund under the LTIF designation.   

6. 

ANALYSIS OF IMPACTS 

This  section  analyses  the  advantages  and  disadvantages  of  the  different  policy  options, 
measured  against  the  criteria  of  their  effectiveness  in  achieving  the  operational  objectives 
(developing  a  common  label,  and  tackling  barriers  to  the  single  market)  and  thereby  the 
specific objectives identified, and their efficiency in terms of achieving these objectives for a 
given  level  of  resources  or  at  lowest  cost.  Impacts  on  relevant  stakeholders  and  their  views 
(see  the  text  boxes)  are  also  considered.  The  policy  options  to  be  retained  should  score  the 
highest  for  each  related  specific  objective  while  at  the  same  time  should  impose  the  lowest 
costs and least adverse impacts on stakeholders.  

6.1. 

Analysis of options 

6.1.1.  Option 1: take no action at EU level 

Under  this  option,  investors  would  benefit  from  funds  subject  to  UCITS  and  AIFMD  rules, 
but would not be able to easily identify long term assets or diversified LTI portfolios in these 
funds. 

Impact  on  investors:  The  requirement  that  UCITS  invest  in  transferable  securities  does  not 
mean  that  investment  objectives  under  UCITS  cannot  be  orientated  towards  the  long  term. 

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However investors in UCITS would be restricted to ‘buy and hold’ strategies, developed by 
means of investments into transferable securities. This would exclude investments into any of 
the long term asset classes set out in Box 1 of this impact assessment. 

Access for investors to such asset classes could potentially be achieved by means of AIFs. As 
set  out  above,  fragmentation  in  the  market  for  different  AIFs  offering  access  to  long  term 
assets would mean that the identification of true long-term asset AIFs would remain difficult, 
and the market in them would likely continue to be bounded by national rules. Many investors 
would  thereby  not  have  ready  access  to  identifiable  and  cost-effective  AIFs  targeting  long 
term assets.  

In  addition,  with  the  AIFMD,  retail  investors  would  not  be  able  to  readily  make  such 
investments  across  borders  and  the  retail  investors  that  would  have  the  possibility  to  make 
such  investments  domestically  would  continue  to  face  inadequate  levels  of  protection  in 
certain cases. The situation would actually vary depending on where an investor lives 

Impact on managers: Neither UCITS nor AIFs would tap the full potential of funds targeting 
long  term  assets.  Because  UCITS  principally  invest  in  bonds  and  stocks,  the  long  term 
potential of non-transferable instruments is out of their scope. The AIF market would remain 
fragmented with no clear fund type focused on long term assets per se. 

Impact on long term financing: Fragmentation along national lines would continue to act as a 
barrier  to  the  emergence  of  a  strong  single  market  in  LTI  funds.  A  lack  of  a  common 
approach on product rules for funds (relating to such areas as redemptions, transparency, and 
asset valuations) would undermine confidence in funds offering long term assets on a cross-
border basis. This wold prevent this vehicles form operating beneath their efficient scale and, 
in turn, would not alleviate the present financing gap felt by many long term projects.    

In short, without action at the EU level the focus of investors will likely remain on very liquid 
and  transferable  securities.  The  AIF  market  is  too  fragmented  or  limited  to  allow  efficient 
access  to  a  diversified  portfolio  of  non-transferable  instruments  that  require  long  term 
commitments. The sectors of the economy that rely on that source of funding will continue to 
have  disadvantages  in  comparison  to  the  entities  that  can  issue  stocks  and  bonds  on  liquid 
markets. The financing of large projects will remain strongly dependent on bank funding or 
tax payer funding.  
Some  stakeholders  advocate  this  option.44  They  highlight  that  equities  and  bonds  are  very 
simple products that have a long history as ways of funding the long-term needs of the real 
economy.  They  are  concerned  that  the  creation  of  another  kind  of  “packaged”  investment 
product  available  for  investors  is  not  as  efficient.  They  believe  that  options  aimed  at 
increasing  the  long-term  engagement  of  shareholders  are  simpler  and  might  well  serve  the 
same purpose. 

6.1.2.  Option 2: Use soft law to develop an LTI fund label 

Impact  on  investors:  This  option  would  increase  convergence  in  the  definition  of  funds 
targeting long term assets but as with option 1, it would not be able to address limits on access 
to  the  funds  in  Member  States  where  retail  marketing  is  not  permitted.  For  retail  investors, 
this option would therefore be broadly equivalent to the situation under option 1. Institutional 
investors who can buy funds more easily on a cross border basis might however receive some 
benefits  from  a  harmonized  LTI  definition.  They  would  more  easily  recognize  the  different 
fund profile and could gain confidence in what they are buying. However, a lack of binding 

44  

The European Federation of Financial Services Users : response to the questionnaire on LTI funds (Annex 7) 

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28 

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common  rules  could  serve  to  undermine  this  confidence  for  some,  while  others  might  be 
overly confident, assuming binding common rules where this is not the case. 

Impact long term financing: The effectiveness of soft-law instruments may be limited for the 
AIF market, since the fragmentation of this market reflects differences in national laws which 
a  soft-law  intervention  would  not  be  able  to  tackle  unless  Member  States  chose  to  change 
their national rules and align them with the emerging label. Experience in the fund sector has 
been that such changes are more patchy and difficult to coordinate if left solely to Member 
States,  and  the  legal  certainty  and  simplicity  of  implementation  of  a  common  approach  is 
preferred by many Member States and fund managers.  

In the absence of convergence by Member States it is unlikely that such an intervention would 
be  able  to  address  fragmentation  effectively.  This  also  reflects  experience  in  the  area  of 
Venture Capital funds, where soft-law interventions have failed consistently to address market 
fragmentation.45 Should the market fragmentation persist at current levels, it is also doubtful 
that  economies  of  scale  would  be  generated  to  increase  the  financing  of  long  term  projects. 
The  EU  will  continue  to  operate  below  their  efficiency  levels  compared  to  their  US 
counterparts. 

Impact on managers: In principle a soft-law intervention would be relatively low in costs for 
participants  –  mostly  creating  administrative  costs  for  Member  State  authorities  and  some 
fund  managers  in  considering  and  responding  to  the  Recommendation.  However,  it  would 
allow  great  flexibility  on  whether  or  how  far  a  new  convergent  LTI  fund  label  would  be 
developed,  allowing  for  more  market  led  developments.  A  likely  lack  of  consistency  in 
approach  could  however  be  relatively  inefficient  for  fund  managers,  leaving  divergences  in 
approach between Member States in place.  

This  option  has  not  been  directly  tested  with  stakeholders.  However  in  the  responses  to  the 
consultation, there is a strong preference for the use of legislative tools rather than soft law, 
either  in  the  form  of  amendments  to  the  existing  EU  law  or  through  a  new  standalone  rule 
book governing the portfolio of LTI funds. 

6.1.3.  Option 3: Long term assets permitted within UCITS  

Impact  on  long  term  financing:  This  option  would  allow  the  €6.3  trillion  UCITS  market  to 
contribute to funding LTI projects. For example, allowing 10% or 15% of this market to be 
invested in these assets represents a potential of about €600-900 billion. Because the UCITS 
framework  has  created  an  accepted  norm  allowing  cross  border  marketing  of  funds,  the 
problem  of  market  fragmentation  would  not  arise.  These  two  elements  would  represent  a 
major boost for the use of LTI by investors and thus for the financing of the real economy. 

Impact on investors: This option would allow retail investors who have an appetite for longer-
term investments to gain exposure to this asset class by investing in regulated UCITS funds 
that  seek  exposure  to  this  asset  class.  Such  an  approach  might  also  be  attractive  for 
institutional investors, many of whom may have a limited capacity to undertake due diligence 
on LTI or indeed AIFs more widely themselves, such that a well-known and well-understood 
framework as UCITS would naturally be preferred over other, less clear and less harmonised 
frameworks.  This  option has also the advantage  of relying on the strong investor protection 
standards  that  are  contained  in  UCITS,  which  would  reduce  the  possibilities  of  mis-selling 
practices. 

45  

http://ec.europa.eu/internal_market/investment/docs/venture_capital/111207-impact-assessment_en.pdf. 

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Impact on managers: Illiquid long term assets would conflict with the fundamental principle 
that  UCITS  are  invested  in  transferable  securities,  and  the  requirement  that  investments  in 
UCITS can be redeemed on demand by investors.  

According to article 84 of the directive, “a UCITS shall repurchase or redeem its units at the 
request of any unit-holder”. This provision is a core element of UCITS funds because it gives 
investors the certainty that their investments can be redeemed on demand. Even a holding of 
10% of illiquid assets could potentially put in peril this regular redemption opportunity. LTI 
have life cycles that often exceed ten years and it is rarely possible to dispose of these assets 
before  their  maturity.  Unlike  transferable  securities,  there  is  often  no  secondary  market  for 
investment tools used to gain access to long term assets (cf. Box 2 of this impact assessment). 
It is hard to conceive of a fund guaranteeing daily redemptions assuming the risk of holding 
assets that cannot be sold for ten years. Even a 10% limit may drastically reduce the liquidity 
profile  of  a  fund.  It  may  impede  its  whole  investment  strategy  and  limit  its  diversification 
opportunities.  

Example 

A fund has assets under management amounting to €100 million, €10 million of which (10%) 
are invested in illiquid non-transferable securities. An investor representing 20% of the fund 
wants to redeem. The fund has to sell €20 million of liquid assets as it cannot sell any of the 
€10 million invested in illiquid assets. The fund then has assets worth 80 million but with €10 
million  still  invested  in  non-transferable  assets  which  would  then  account  for  12.5%  of  the 
portfolio,  thus  exceeding  the  10%  maximum.  Rebalancing  to  the  permissible  10%  ratio  can 
only be achieved if new investors subscribe as the illiquid assets cannot be sold.   

As the example shows, as the assets under management in a fund decrease, the proportion of 
assets that are non-transferable will increase.  

Making  investments  into  long  term  assets  and  monitoring  and  supporting  these  investments 
also  requires  a  different  skill  base  and  expertise  than  the  other  investments  of  UCITS.  This 
could raise costs or reduce uptake of such possibilities by UCITS funds. 

In addition, the marketing of UCITS invested in non-transferable securities, and sold as such, 
could well confuse investors, given the broad market acceptance of UCITS. Such an option 
would require changing the name of UCITS since Undertakings for Collective Investments in 
Transferable  Securities  would  no  longer  be  valid.  There  is  an  important  risk  to  irreversibly 
damage  the  UCITS  brand  and  its  acceptance  by  investors.  The  UCITS  brand  as  an  export 
product could also suffer from this strategic change. 

These  concerns  are  strong  enough  that  a  majority  of  respondents  –  fund  managers, 
supervisors, investor’s representatives – to the Commission consultation were against the use 
of  UCITS  as  a  vehicle  for  LTI  funds.46  Earlier  consultation  on  social  investment  funds  was 
consistent  with  this;  with  views  diverging  on  how  far  UCITS  could  technically  be  adjusted 
invest in assets that are not transferable securities, and whether this was sensible.47 

Regarding  investments  in  non-eligible  assets  by  a  UCITS,  respondents  to  the  consultation 
were mainly opposed to UCITS funds being allowed to invest in EuSEF: 61% opposed this 
possibility,  arguing  that  such  investments  by  means  of  a  bespoke  LTI  fund  would  be  more 
suitable. 

46  
47  

See Annex 6. 
See http://ec.europa.eu/internal_market/investment/docs/social_investment/20111207ia_en.pdf p. 78. 

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6.1.4.  Option 4: LTI fund for institutional investors   

Impact on long term financing: Eligibility rules would clarify that the LTI fund would have to 
acquire  long  term  assets  directly  from  the  issuing  entity  or  take  direct  participations  in 
projects.  This  would  significantly  enhance  the  engagement  of  the  asset  manager  with  the 
operator of the investee project, and clearly target financing to those entities or projects that 
have not already gained access to capital markets. There are several positive benefits for long-
term investing in stipulating direct investments:  

1.  Direct financing reduces costs associated with intermediaries.  

2.  Indirect exposure entails the risk that the LTI fund is not entirely exposed to the long 

term asset but to other risks, such as counterparty or market risks.  

3.  Direct  exposure  requires  managers  to  acquire  sufficient  knowledge  of  the  different 
assets  in  which  they  are  investing.  This  would  clearly  add  value  for  investors  who 
themselves are not able to acquire such knowledge. 

Long term financing would also stand to benefit from clarity on what constitutes a long term 
assets and what financial instruments are eligible to gain exposure to such assets.  

1.  Clarity on long term asset classes: The eligibility rules would also clearly set out the 
asset  classes 
transport, 
communications),  and  social  infrastructure  such  as  hospitals;  and  unlisted  SMEs. 
Commodity investments would not be permitted.  

that  are  permitted,  such  as 

infrastructure  (energy, 

2.  Clarity on eligible instruments to gain exposure to long-term assets: A clearly defined 
LTI  fund  would  be  achieved  by  means  of  precise  rules  concerning  the  investment 
instruments  to  be  used  by  LTI  funds:  direct  equity  or  quasi-equity  participations, 
bonds  and  loan  agreements.  For  example  an  LTI  fund  could  hold  a  share  in  a 
consortium  building  a  school,  a  share  in  a  Special  Purpose  Vehicle  in  charge  of  a 
concession  contract  covering  prisons  building  and  maintenance,  another  share  in  an 
entity  promoting  and  building  apartments,  with  the  remainder  of  the  portfolio 
distributed in the form of loans to companies.48 Financing to the real economy could 
thus be improved.  

Long-term  financing  is  enhanced  because  a  LTI  fund  manager  would  need  to  act  as  a 
knowledgeable intermediary capable of screening appropriate projects, undertaking risk/return 
analysis and due diligence, and effecting and monitoring investments in a cost effective way. 
Even  the  larger  pension  plans  only  have  a  staff  of  one  or  two  dedicated  to  managing  the 
investment  portfolio,  and  so  would  be  unable  to  undertake  this  work  directly.  On  the  other 
hand, diversification requirements along the lines of UCITS, which require a minimum of 16 
assets, would appear too restrictive.    

A uniform set of asset eligibility and product rules at EU level could enhance the awareness 
and trust of investors in these asset classes and thus increase money flows in this sector. This 
would  help  drive  cross  border  marketing  of  such  funds,  ensuring  investors  across  Europe 
would be able to find funds they have confidence in. Cross border marketing and cross border 
fundraising  will  create  economies  of  scale  that  reduce  the  costs  of  investing  in  long  term 
assets and at the same time increase the available money to invest.  

Impact  on  managers:  The  creation  of  a  cross  border  fund  framework  will  facilitate  the 
operations of fund managers across Europe. Greater consistency in requirements reduces costs 

48  

The attribution of loans necessitate in some Member States to have a banking license. This proposal for LTI fund 
will not cover this aspect of the regulation. 

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for those operating cross border, while enhancing options for those looking to expand in this 
way. Economies of scale would develop as the funds increase in size or number.  

In order to ensure LTI funds can offer a range of strategies and mitigate risks associated with 
their investments, fund managers would have the option – but not the obligation – to invest to 
a limited degree in assets that are not long term. Investments in transferable securities, such as 
stocks, bonds or short term money market instruments, would be permitted, as long as such 
investments do not exceed a pre-defined maximum threshold of, for example 30% (balancing 
flexibility with the requisite focus on long-term assets). Such shorter term investments could 
provide a  'bridge'  for the fund whilst  the manager identifies new investments. A  70/30  split 
between  long-term  assets  and  transferable  securities  would  give  greater  confidence  that  the 
LTI fund manager can enhance its overall ability to pursue an effective strategy dedicated to 
funding long term projects. This could widen the range of investors the funds target.  

The responses to the questionnaire highlight the need for some flexibility for acquiring short-
term  assets,  as  a  portfolio  management  tool.  Stakeholders  propose  different  thresholds  for 
this, mainly between 5% and 30%. Therefore the proposed threshold of 30% coincides with 
the  expectations  of  market  participants:  it  sets  the  upper  limit  at  30%  to  ensure  the  greatest 
degree of flexibility (fund managers are free to invest more than 70% in illiquid assets, should 
they decide to do so). 

Impact  on  investors:  With  this  option  the  target  investor  base  is  potentially  very  wide  – 
notable  both  larger  investors  and  the  underdeveloped  group  of  medium-sized  institutional 
investors,  such  as  smaller  pension  funds, 
insurance  undertakings,  foundations  or 
municipalities.  

Pension funds or insurers might particularly seek investments that enable them to match their 
long term liability profile, thereby focussing on the cash flow projections of any investment. 
However,  other  institutional/professional  investors  may  be  more  focussed  on  long-term 
capital growth. Also, some investors will prefer the cash flow (and risk-return profile) of an 
initial  construction  phase  ("greenfield")  while  others  would  express  a  preference  for 
subsequent phases ("brownfield").  Indeed, one pension fund (the Tesco Pension Fund) argues 
that  a  pension  plan  might  actively  choose  to  exit  certain  investments  after  the  construction 
phase.  

The  impact  of  having  access  to  trusted  long  term  investment  funds  with  known  investment 
targets  could  be  positive  for  the  planning  horizon  of  pension  plans,  offering  new  options 
alongside, for instance, low-yielding Government bonds. This could be particularly the case 
for  those  operating  defined  benefit  (DB)  pension  schemes  who  have  the  ability  to  allocate 
appropriate parts of their portfolios to assets such as LTI funds. While some managers might 
focus  their  marketing  efforts  on  very  large  pension  schemes,  such  as  those  prevalent  in  the 
Netherlands,  other  fund  managers  have  indicated  that  they  would  offer  their  product  to 
smaller pension schemes administering assets of €500 million to €1 billion. A pension scheme 
operator  (Tesco)  suggests  that  a  uniform  long-term  investment  scheme  would  also  be 
attractive to pension plans administering assets of between £100-500 million (approx. €120-
600 million). 

Not all of the above mentioned institutional investors have sufficient knowledge and expertise 
to assess the risks of the products they are acquiring. Nevertheless, for institutional investors 
that  are  more  familiar  with  the  different  long-term  asset  classes,  an  LTI  fund  could  be 
designed  that  will  go  beyond  the  minimum  allocation  of  70%  to  long-term  asset  classes. 
Three aspects need however to be addressed in order to create investor confidence: the fund’s 
type, transparency and the costs of the investments. 

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On  the  other  hand,  this  option  would  not  create  additional  rights  for  LTI  funds  to  market 
themselves  to  ‘high  net  worth  individuals’  or  family  offices,  or  more  importantly  to  retail 
investors. The marketing of the LTI funds to retail investors would remain subject to national 
rules,  and  thereby  fragmented  and  subject  to  different  investor  protection  standards.  This 
option would therefore be unlikely to widen access for retail investors, or tackle barriers to the 
single  market  in  funds  for  such  investors.  Institutional  investors  that  only  wish  to  invest  in 
funds  that  are  subject  to  the  highest  levels of  regulation  (as  found  in  retail  products)  would 
also not gain from this option. But this option has the advantage to bring clarity as to what is a 
long-term  asset  and  what  is  a  LTI  fund  so  that  investors  are  not  any  longer  misled  in  what 
they acquire. 

Impact  on  fund  structures:  The  illiquidity  of  long-term  assets  makes  them  better  suited  for 
closed-ended  funds  types.  Under  this  option  the  fund  would  remain  closed  to  redemptions 
until the investments (equity, quasi-equity, bonds or loans) come to maturity. The  length of 
the  fund  would  be  decided  by  the  manager  depending  on  the  asset  classes  in  which  he  is 
investing and the maturity profile of the instruments employed to gain exposure to these asset 
classes.  Institutional  investors  are  used  to  commit  money  for  long  period  of  times  without 
early redemption possibilities and they are also able to identify the risks associated with long 
holding  periods.  These  rules  would  ensure  consistency  for  LTI  funds  so  that  they  take  a 
common  identifiable  form,  to  increase  recognition  and  understanding  of  these  funds  by 
investors. This has also the advantage of avoiding open-ended funds being forced to suspend 
redemptions for an indeterminate period where there is an excess of redemption requests and 
assets become too illiquid, undermining trust in the funds. In addition, transparency rules need 
to  be  established,  in  particular  to  ensure  ‘look  through’  in  terms  of  the  assets  in  which  the 
fund invests. It is important that investors know precisely what the fund is buying. 

The  investment  of  institutional  investors  is  mostly  performed  through  private  placement 
regimes where the investor is in direct contact with the fund manager. As such it is easier for 
the investor to identify and ratify the costs of the funds since there is no distributor involved. 
It is however important that the fund manager discloses in a transparent and precise manner 
all the costs that have been incurred when launching the fund and will likely be incurred in the 
future. These may include acquisition costs for assets, the costs of external consulting, legal 
costs and any other costs that may be incurred. This will give a better insight to the investor 
for making its investment decision.  

Feedback  from  institutional  investors  has  shown  that  transparency  on  the  actual  asset 
exposures  created  by  a  fund  is  vital  in  aiding  these  investors  with  applying  new  risk-based 
prudential  and  solvency  rules.  Ensuring  regular  valuation  of  assets  and  regular 
communication to investors of the main risks of their investments were cited as examples of 
possible transparency requirements. 

6.1.5.  Option 5: LTI fund for institutional investors and HNWI 

Impact on long-term financing: This option is similar to option 4, but follows the approach in 
the EuVECA and EuSEF fund frameworks. These extend the range of investors the funds can 
be  marketed  to.  It  would  include  affluent  ‘retail’  investors  who  are  able  to  commit  to  a 
minimum  investment  of  €100,000.  This  follows  a  similar  allowance  in  the  Prospectus 
Directive  relating  to  access  to  some  public  offers,  and  is  a  common  approach  for  allowing 
limited  retail  exposure.  This  approach  was  adopted  for  those  two  fund  frameworks  because 
the  funding  from  so-called  ‘high  net  worth  individuals’  (HNWI)  and  family  offices  had 
traditionally been key to the evolution of the venture capital and social investment markets. In 
both  markets,  the  motivation  of  individual  investors  can  be  particularly  important,  and  so 
restricting access to such ‘qualified’ retail investors could have strong impacts on the viability 

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of  the  regimes.  Such  investors  do  not  generally  require  the  same  consumer  protection 
measures  to  be  in  place  as  for  mass  retail  investors,  and  can  in  principle  be  treated  as 
professional investors. Therefore the product rules would be the same as under option 4. 

But, as with the previous option, this approach would not address inconsistencies in national 
rules  related  to  retail  funds,  and  so  fragmentation  in  the  market  and  divergent  investor 
protection  standards  would  be  likely  to  remain.  This  could  reduce  take  up,  if  this 
fragmentation in the retail market has an impact on the institutional market. 

Impact on LTI funds: Including HNWIs might not significantly increase the client base for an 
LTI  fund.  A  €100,000  entry  ticket  is  set  high  enough  to  restrict  considerably  the  scope  of 
eligible  investors.  The  average  investment  in  French  FCPI  funds  amount  to  €8,100  and  the 
average  investment  in  German  LTI  closed-ended  funds  ranges  from  €6,000  to  €60,000 
depending on the asset class. In addition, many HNWI can be expected not to invest directly 
anyway. They often have sufficient size to be regarded as private clients and as such would be 
covered by private banks or by private wealth managers. These intermediaries count already 
as professional  investors  and  do not need to take into account an entry ticket. The potential 
additional take up over option 4 might therefore be expected to be limited. 

In general terms, LTI funds can be expected to be a less niche investment than investments in 
either EuVECA and EuSEF, so demand from HNWIs may be less critical to the development 
of the market. In addition, this approach does not widen access to LTI fund investments for 
those retail investors wanting to diversify their portfolios but who are not willing or able to 
commit €100,000. As with the previous option, those institutional investors reluctant to invest 
in  non-retail  funds  would  likely  not  be  persuaded  by  an  LTI  fund  targeted  at  qualified 
investors only. 

This  option  would  however  extend  access  for  some  HNWI  and  others  willing  and  able  to 
commit more than €100,000, and so despite these caveats, can be expected to have marginally 
wider impact than option 4 alone. 

Impact  on  managers:  as  with  the  option  4,  managers  will  gain  if  a  cross  border  fund 
framework is established. Their costs will likely fall whereas their fund volume could increase 
so increasing their margins and allowing them to enter markets hitherto considered too risky 
or costly. Operational costs might however be slightly higher than under option 4 if managers 
have  to  deal  with  HNWI  and  minimum  entry  tickets.  The  marketing  of  these  funds  would 
have to target investors with sufficient capital and identifying investors capable of committing 
€100,000 may drive incoming investment acquisition costs up.  

The option to open up LTI funds to HNWI were not explicitly addressed in the consultation 
questions with stakeholders. Options to allow some targeted retail access emerged in some of 
the  responses.  For  example  Ernst&Young,  while  believing  that  retail  investors  should  not 
have  access  to  all  types  of  funds,  noted  the  provisions  in  MiFID  that  allow  retail  investors 
under certain preconditions to opt to be treated as professional. (The investor must satisfy two 
of the following: have a minimum portfolio value (€500,000), undertake an average number 
of transactions (10 per quarter) or have experience in the financial sector (minimum 1 year).) 

6.1.6.  Option 6: LTI retail fund passport with no redemptions  

The option 6 will build upon the basic framework established in options 4 and 5 – adjusting 
this  framework  to  make  it  suitable  for  retail  participation.  This  implies  that  option  6  will 
contain somewhat more detailed rules on the investment policies that an LTIF is allowed to 
pursue. 

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For example, while options 4 and 5 would allow for a higher level of concentration in a fund 
portfolio,  option  6  introduces  a  general  requirement  that  the  LTIF  should  not  be  exposed 
beyond 10%, respectively 20% of its capital to a single issuer of equity, debt or other forms of 
participations. Likewise, a single real asset should not constitute more than 10% of the LTIF's 
capital. Equally, the strict rules against leverage at fund level aims to ensure that LTIFs do not 
take on improper risk. A comparable set of rules would not have been strictly necessary if the 
LTIF would not be open to retail investors.  

Option 6, when compared to options 4 and 5, also adds a series of investor protection rules. 
Foremost  are  the  rules  on  redemptions  -  the  absence  of  early  redemptions  will  need  to  be 
clearly defined in the LTIFs rules or instruments of incorporation and this feature must also be 
clearly disclosed to investors. Last, but not least, the envisaged option will provide additional 
protection to retail investors by setting out basic rules for the trading in LTIF units or shares 
on  secondary  markets  and  the  issuance  of  new  shares  (aimed  at  avoiding  dilution  to  the 
detriment of existing unit- or shareholders). These rules are specific to the retail orientation of 
option 6 and would not have needed to be spelled out in a professional investor scheme. 

Impact on long term financing: This option could support strong take up by removing barriers 
that  effectively  prevent  LTI  funds  targeting  investments  by  retail  investors.  While  under 
AIFMD  there  are  no  hard  barriers  for  institutional  investors  accessing  LTI  funds  (barriers 
are  rather  soft,  related  to  lack  of  a  clear  common  definition  or  labelling  of  such  funds),  the 
deepest  untapped  capital  pools  for  LTI  funds  may  well  sit  in  the  areas  where  hard  barriers 
exist – that is, where cross-border retail access is not possible. Because the LTI fund would 
not bestow redemption rights on investors, this will facilitate investments in all kind of long-
term  assets,  even  the  most  illiquid.  In  practice  this  means  that  investments  in  greenfield 
projects will be possible. 

Impact  on  LTI  funds:  Permitting  cross-border  marketing  to  retail  investors  of  the  LTI  fund 
described in Option 4 both potentially allows the deepest capital pools to be drawn on while 
also driving harmonisation of the fund market for LTI funds.  

Option 6 would potentially allow a wider range of investors when compared to Options 4 and 
5. A retail framework designed to allow for the widest range of investors would also create 
deeper trust amongst investors of all types, so deepening inflows. This reflects the experience 
in the EU with the UCITS Directive. The potential take-up of such funds is assessed in greater 
details in sections 7.2 and 7.3. 

Consultation  responses  reveal  that,  for  want  of  the  appropriate  investment  vehicles,  there  is 
unmet  retail  investor  appetite  for  investments  into  long  term  assets.  For  example,  retail 
investments  into  fund  vehicles  across  a  number  of  national  markets  indicate  demand;  for 
instance,  UK  retail  subscriptions  to  property  funds  have  significantly  outpaced  institutional 
investments in recent years.49  

In Germany retail investors represent in 2012 70% of the money that has been raised in the 
LTI  closed-ended  fund  sector.  In  France  private  investors  represented  30%  of  the  money 
raised in the private equity sector between 2008 and the first half of 2012.50 Retail investor 
access  is  contingent  on  national  rules.  In  the  markets  where  funds  are  opened  to  retail 
investors,  they  have  emerged  as  a  substantial  proportion  of  the  total  investors  (See  Annex 
4.4.2).  While  in  some  cases  the  investment  of  retail  investors  is  often  linked  to  specific  tax 
regimes, in other cases the investment is uniquely driven by the long-term characteristics of 

49  
50  

In 2012, net retail sales were £373 million; net institutional sales were negative (£183 million). IMA. 
Please see Annex 5 for details. 

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the  assets.  The  fact  that  in  some  countries  no  framework  exists  for  the  investment  of  retail 
investors deprive these potential investors of an entire class.  

Stakeholder  commentary  from  insurer  and  pension  fund  representatives  has  made  clear  that 
the  creation  of  UCITS  for  retail  investors  has  also  increased  the  confidence  of  institutional 
investors. This also reflects the limited capacity of many institutional investors to engage in 
due diligence on investments, such that a well-known and well-understood framework such as 
UCITS would naturally be preferred over other, less clear and less harmonised frameworks. 

Long term savings plans offered by banks often fall short in delivering the best returns given 
the long term nature of these savings objectives. A small allocation of the total portfolio of a 
retail  investor  to  LTI  funds  could  have  the  potential  to  increase  the  total  return  that  the 
investor achieves annually, without exposing the investor to risk of short-term losses due to 
financial  market  movements,  and  without  unduly  reducing  the  overall  liquidity  of  the 
investor’s portfolio. 

Consultation  respondents  mostly  (83%)  took  a  view that retail access should be  considered, 
and opposed focusing solely on institutional investors.  

Bilateral discussions with selected firms operating in the closed-ended LTI market indicated 
that for these firms – whose investors are not in general retail investors, though they may offer 
some  linked  vehicles  for  this  purpose  –  retail  access  might  raise  problems  (for  instance, 
needing  to  handle  large  numbers  of  investors  rather  than  a  small  number  of  institutional 
investors,  concerns  over  mis-sales  to  retail  customers  unaware  of  the  nature  of  the 
investments). One firm noted however that retail investors could be counter-cyclical in their 
behaviour, remaining invested for the longer term when institutional investors disinvest due to 
short term targets. 

On the other hand, this option could be beneficial for most institutional investors. As noted by 
an association representing institutional investors only, these investors are strongly focused on 
gaining  access  to  new  types  of  assets  that  combine  high  security  with  a  higher  yield  than 
government bonds. 

Impact on investors: To limit as much as possible mis-selling to retail investors, the new LTI 
fund would need harmonized product rules to ensure that the risks are mitigated. To this effect 
rules in the areas of diversification, derivatives, transparency, leverage, and conflict of interest 
are necessary. 

Diversification is already used in most funds as a means to reduce portfolio risk. Too great an 
exposure to a single asset creates the risk that investors lose all their money if this asset loses 
value. Diversification spreads this risk among different assets, reducing individual exposures. 
Requiring the same diversification rules for all LTI funds will ensure that the investors face 
the  same  level  of  diversification  risk  for  funds  sold  cross-border  compared  to  those  sold 
domestically.  While  most  funds  would  not  be  impacted  as  they  already  use  diversification 
techniques,  some  infrastructure  funds  could  face  difficulties  reaching  a  sufficient  level  of 
diversification. The large average size of infrastructure projects (often above several hundred 
million  euros)  creates  specific  constraints  as  it  requires  significant  capital  commitments 
(sometimes  above  €50  million  for  each  individual  project  investor)  from  each  investor  in 
order  to  be  able  to  participate.  A  high  diversification  requirement  could  therefore  restrict 
smaller  funds  from  participating  in  infrastructure  investments.  This  argument  is  however 
counterbalanced by the fact that the majority of existing infrastructure funds investing in the 
most  illiquid  "greenfield"  projects  are  able  to  diversify  (necessary  to  attract  investors  given 
the  higher  risks  of  such  projects).  Specifying  a  minimum  number  of  issuers  that  need  to  be 

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present  in  the  portfolio  of  fund  (e.g.,  require  at  least  8  different  issuers)  while  setting  a 
maximum proportion for a single asset that is high enough (biggest issuer capped at 20%) to 
allow participation in infrastructure could however address easily this issue. 

A key factor in establishing the trust of investors in these funds would be their clear focus on 
long  term  asset  classes  without  dilution  by  means  of  complex  financial  instruments  and 
techniques. For this reason it is necessary to ensure the funds do not use overly complicated 
investment strategies or financial instruments, so that their focus on long term asset classes is 
clear, proven and understandable. The use of derivatives should be limited solely to hedging 
against certain risk inherent in the project (interest rates, duration). 

Cost transparency is vital for safeguarding investor confidence in LTI funds. It is important 
that  investors  are  able  to  assess,  prior  to  a commitment  and  also  during  the  life  time  of  the 
investment,  likely  performance  net  of  any  fees  or  costs.  It  should  not  be  possible  for  the 
manager to show possible returns of the fund whereby investors would not know also the fees 
that would be taken and the impact these have. Because sales to retail investors will mostly 
entail multiple layers of distribution costs, this transparency shall include all costs, including 
fees  paid  to  banks  and  distributors.  Such  a  requirement  would  not  create  material  burdens 
since all managers offering products to retail investors will be required under the upcoming 
PRIPS Regulation (Commission proposal for a Regulation on key information documents for 
investment  products  of  3  July  2012  COM  (2012)  352  final)  to  provide  this  level  of 
information.  

To  match  the  interests  of  investors  and  the  long-term  profile  of  the  fund  the  manager  will 
have  to  develop  adequate  fee  structures.  To  align  the  fee  structure  with  the  long-term 
commitment  of  the  investors,  short-term  benchmarks  for  determining  performance  and  fees 
should  be  avoided.  The  incentives  of  the  manager  should  be  aligned  with  those  of  their 
investors and those of the investment targets. 

Transparency also in relation to the fund and its closed-ended nature would be vital, so that 
investors are clear as to the nature of the proposition on offer. 

Leverage will need to be restricted to levels that do not impact the return expectation and risk 
profile of the investor. Under current national rules there may be no limits such that leverage 
of up to 4 or 5 times can be found. This creates a more complex risk-reward profile. Where 
the fund borrows, repaying this lending can take precedence over returns to investors in case 
of  problems.  This  can  undermine  the  interests  of  retail  investors.  On  the  other  hand  the 
leverage  is  useful  to  boost  the  investment  possibilities  of  the  fund  or  to  allow  some 
operational  flexibility  when  taking  up  opportunities;  under  ideal  circumstances  leverage 
enhances  the  return  of  the  investors.  A  right  balance  need  to  be  found  between  the  two 
constraints. 

To prevent conflicts of interest, rules will need to be established to ensure that the managers 
acts  in  good  faith  and  in  the  best  interests  of  their  investors,  and  avoid  possible  conflicts 
where a fund manager might be linked to investment targets. 

Diversification  and  transparency  are  two  characteristics  that  most  of  the  respondents  to  the 
questionnaire highlighted. Different levels of diversification were proposed, ranging from one 
issuer (often also referred to as a counterparty') for an infrastructure fund targeting only one 
project  to  15.  However,  most  of  the  responses  proposed  diversification  limits  of  between  5 
and 15 counterparties.  

87%  of  respondents  to  the  consultation  expressed  strong  views  in  favour  of  diversification 
requirements  for  the  avoidance  of  excessive  concentration  risk  and  ensuring  adequate 
liquidity  requirements.  Although  most  respondents  considered  diversification  to  be  an 

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important  feature  of  an  investment  fund,  several  respondents  argued  that  levels  of 
diversification should be dependent upon  the funds form. Diversification requirements  were 
considered more pertinent for open-ended funds, whilst of less importance for closed-ended 
funds. 

As under option 4 and 5 the fund would remain closed to redemptions. Closing the fund has 
the advantage of permitting investments in all types of long-term assets as the structure better 
matches  the  illiquidity  profile  of  these  assets.  Such  a  solution  has  the  merit  of  being 
transparent as to the long-term commitment that investing in such assets requires.   

In many cases a secondary market may develop for the shares of the funds, possibly under the 
initiative  of  distributors.  Investors  may  independently  use  this  for  selling  their  share  of  the 
fund to other investors that want to buy. Some funds shares are even listed on stock markets 
and  benefit  from  substantial  volumes  in  these secondary  markets.  The  possibility  to  use  the 
secondary market should not however be presented as guaranteed, as there remains (should a 
fund  face  a  run)  a  risk  that  sellers  are  unable  to  find  buyers.  As  buyers  dry  up  spreads  will 
grow, harming investors. Therefore the managers should make prominent statements to their 
investors that while it may be possible to sell one’s investment through a secondary market, 
there can be no guarantee of this, and investors must be ready to commit their investment for 
a long period of time.  

Greatly improved and harmonized product rules may mitigate risks of mis-selling, particularly 
also in the context of rules already applying to distributors to act in the best interest of their 
clients  (notably  the  conduct  of  business  rules  under  MiFID).  Strong  investor  protection 
standards create a solid basis for facilitating the marketing of LTI funds to all investors. This 
will  aid  institutional  investors  as  well  as  retail,  building  confidence  in  long-term  assets. 
Transparency about risks and returns as well as costs can aid investors in understanding and 
comparing  LTI  funds  with  competing  investment  opportunities.  Clear  and  strong  common 
rules underpin – as is the UCITS experience – greater trust in funds operating under the rules, 
particularly where those funds are domiciled in another Member State.  

The  fact  that  such  funds  would  not  allow  redemptions  during  their  lifecycle  may  however 
limit  the  range  of  retail  investors  willing  to  invest  in  such  funds,  particularly  where  offered 
with ten year or longer time horizons. Risks remain that retail investors invest in such funds 
without  fully  grasping  the  risk  and  liquidity  consequences,  even  where  disclosures  are 
transparent  and  clear.  Should  retail  detriment  arise  that  is  not  effectively  mitigated  through 
MiFID  rules  or  the  rules  under  this  option  –  through  either  active  mis-selling  and  non-
compliance, or investors failing to undertake sufficient due diligence – this could negatively 
impact the development of an LTI fund market.  

Behavioural  research  in  the  retail  market  also  shows  that  retail  investors  are  often  overly 
confident  about  their  financial  wherewithal  to  hold  an  investment  to  maturity.  On  the  other 
hand,  in  many  national  retail  markets  the  products  with  long  time  horizons  are  common. 
Some retail investors are clearly ready to commit money for long periods of time (as can be 
seen  from  the  German  closed-ended  fund  market).  This  option  has  also  the  advantage  to 
match the investment needs of the institutional investors which prefer funds providing long-
term returns instead of having regular redemption facilities.  

Almost every stakeholder recognizes the need for sufficiently long holding periods on the side 
of investors so as to ensure the manager can invest in long term assets. The responses are split 
as  to  whether  a  closed-ended  or  open-ended  form  of  fund  makes  most  sense.  Open-ended 
funds  provide  redemption  rights  by  definition,  whereas  closed-ended  funds  operate  without 
providing  specific  rights;  investors  are  free  to  sell  their  fund  shares  in  a  secondary  market 
(where  this  exists).  Private  equity  and  venture  capital  funds  normally  are  closed-ended  and 

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offer  no  redemption  rights.  Equally,  most  infrastructure  fund  managers  oppose  allowing 
redemption  rights,  as  they  wish  to  find  investors  that  adopt  a  “buy  and  hold  to  maturity” 
strategy.  One  fund  manager51  explains  that  investors  should  only  be  permitted  to  get  their 
money  back  through  portfolio  company  dividends  and/or  exit  proceeds,  or  through  the 
secondary market. 

Impact on managers: Greater harmonisation would reduce costs for fund managers operating 
cross-border once they take up the option of the new regime, as this removes differences in 
treatment between different markets. The impact of these differences can be strong for fund 
managers  seeking  to  raise  funds  cross-border;  in  the  Commission  impact  assessment  on 
private  placements,  estimates  of  legal  costs  could  reach  as  high  as  €450,000,  and  run  to 
€20,000  per  Member  State  targeted  for  cross-border  fund  raising.52  In  the  absence  of 
harmonisation,  differences  in  national  regimes  will  continue,  particularly  in  the  context  of 
retail funds, as a reflection of different market expectations and traditions. The material scale 
of  cost  reductions  from  harmonisation  could  ultimately  be  driven  by  the  costs  of 
establishment and duplication of funds across different markets.  

However  for  fund  managers,  the  benefits  of  a  deeper  and  broader  investor  base  need  to  be 
balanced against costs. Setting up funds with product rules on diversification or transparency 
might limit the investment freedom for the managers. Operational costs should be limited; this 
would mainly consist in costs for improving the transparency in fund marketing material. And 
the  fact  that  under  this  option  the  newly  created  fund  vehicle  would  not  entail  redemption 
rights, would limit the costs associated with the management of the fund. 

The fact that managers can target all investors indiscriminately will be an advantage in their 
marketing  strategy.  Dealing  with  retail  investors  might  however  be  more  costly  than  with 
institutional investors as they require more explanatory disclosures and the risk of mis-selling 
and associated complaints is higher.  

This  option  has  the  advantage  of  matching  most  existing  models  in  the  different  Member 
States that have already LTI funds open to retail investors. The existing funds typically do not 
bestow  redemption  rights:  private  equity  funds,  infrastructure  funds  or  some  property  funds 
are mostly of a closed nature.  

According to the consultation, 83% of respondents to the Commission consultation supported 
moves  to  develop  retail  LTI  funds.  Most  of  the  respondents  that  favoured  this  option  come 
from  the  asset  management  sector.  They  believe  that  such  an  LTI  fund  could  increase  the 
investment opportunities for investors and market opportunities for fund managers.  

The  responses  to  the  questionnaire  are  more  split  on  this  issue.  Certain  asset  managers, 
particularly in the infrastructure fund market, believe that retail access to LTI fund might not 
be suitable due to the long commitments needed. Others, who believe that the LTI initiative 
should be the instrument to introduce property as an asset class open for cross-border funds, 
believe  that  retail  access  should  only  be  foreseen  for  property,  but  that  other  asset  classes 
should not be part of a retail access regime.  

Impact  of  a  closed-ended  (no  redemptions)  structure  on  possible  investor  take-up:  The 
preponderance of long-term investment schemes that operate at national level function as fund 

51  

52  

Marguerite  Adviser  SA,  investment  adviser  of  the  2020  European  Fund  for  Energy,  Climate  Change  and 
Infrastructure (the Marguerite Fund): response to the questionnaire 
This data predates AIFMD, which will have some impact on costs of operating cross border by creating consistent 
management rules. AIFMD does not however harmonise product rules. See 
http://ec.europa.eu/internal_market/investment/docs/legal_texts/ia_private-placement_en.pdf, p. 13. 

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models  (whether  officially  defined  as  'closed'  or  'open'  ended  in  their  prospectuses  or 
marketing materials) that do not offer early redemptions (cf., Annex 2: national fund rules). 
For  example,  the  entire  range  of  French  investment  schemes,  FCPR,  FCPI  or  FIP  are 
structured as 'open ended' vehicles in the sense that they can issue new shares but they do not 
offer  existing  shareholders  the  opportunity  to  redeem  prior  to  the  winding  up  of  the  funds 
themselves.  The  same  is  true  for  UK  based  Qualified  Investor  Schemes  (QIS)  or  limited 
partnerships.  The  only  exception  is  Germany,  where  real  estate  funds  did  offer  regular 
redemptions while being invested in illiquid real estate assets.  But, as described in the Annex 
of  this  IA  (Section  5.4)  the  German  model  did  not  prove  workable  in  practice  and  the 
legislative framework for Open Ended Real Estate Funds (OREIF) has undergone substantial 
reform: a minimum holding period of two years was introduced with redemption request only 
being  accepted  if  they  were  preceded  by  a  notice  period  of  12  months.  In  addition,  the 
German  Government,  as  part  of  the  transposition  of  the  AIFM  Directive,  envisages  further 
restrictions on the opportunities to redeem investments in OREIFs.  

In light of this experience, the combination of illiquid portfolio assets and regular redemptions 
is  not  a  workable  proposal.  On  balance,  the  reputational  risk  for  the  new  LTIF  scheme  that 
would  be  associated  with  a  potential  redemption  bottleneck  outweighs  the  risk  that  the 
absence  of  regular  redemptions  reduces  potential  take-up  of  LTIF  investments  by  the  retail 
investor  community.  This  conclusion  is  even  more  valid  when  considering  that  both  the 
French  and  the  UK  long-term  schemes  have  managed  to  attract  significant  retail  interest 
without offering regular redemption opportunities.   

In  this  context,  it  is  noteworthy  that  the  French  investor  base  in  long-term  investment 
schemes,  which  in  2008  stood  at  roughly  7.5  billion,  amounts  to  30%  of  the  private  equity 
assets  managed  by  the  fund  sector  (Annex,  Section  5.7).  This  comes  despite  the  fact  that 
French  funds  in  the  private  equity  space  do  not  offer  early  redemptions.    The  popularity  of 
retail  investments  into  private  equity  is  further  borne  out  by  the  fact  that  a  total  of  91.000 
investors have invested in such funds – clearly undeterred by the fact that these funds require 
investors to remain invested during the funds entire life.  

Also the German Federation representing 'closed ended' funds that offer no early redemptions 
(Verband Geschlossener Fonds – VGF) reports that 70% of its investor base stems from the 
retail  space.  VGF  funds  invest  in  long-term  assets  such  as  infrastructure,  energy,  private 
equity  and  real  assets  (ships,  aircraft).  The  absence  of  early  redemptions  has  not  deterred 
retail investors to contribute € 3.5 billion (70% of an overall amount of € 4.5 billion) to funds 
that offer no early redemptions.  

In  light  of  the  above,  early  redemptions  are  not  an  indispensable  feature  to  attract  retail 
interest in such funds. But even if the absence of early redemptions would somewhat lessen 
the potential retail take-up of the new breed of LTIF funds, this risk is to be accepted to avoid 
an even bigger one: the risk that a redemption bottleneck in the early phases of the new LTIF 
scheme  depreciates  the  image  and  the  trust  that the  scheme  needs  in  order  to  at  least  partly 
match the success of the UCITS framework. This risk that retail investors would not commit 
money for long periods of time has also to be accepted in light of the potential higher take up 
from institutional investors that such an option would create. 

6.1.7.  Option 7: LTI retail fund passport with redemptions 

Impact on long term financing: As for option 6, one key benefit of option 7 would be that it 
would  reduce  fragmentation  and  remove  barriers  to  the  development  of  a  single  market. 
Despite  the  issues  just  noted,  national  regimes  have  developed  in  some  Member  States  to 

EN 

40 

   EN 

 
permit  retail  access  to  illiquid  assets,  typically  through  open-ended  or  quasi-open-ended 
structures  which  permit  redemptions  under  certain  conditions.53  An  EU  framework  for  LTI 
funds  along  these  lines  would  compete  with  these  regimes,  but  carry  the  strong  benefit  of 
establishing a common approach across the Union, adding much needed depth of capital and 
breadth of geographic scope for the location of investors and investment targets.  

On the other hand, in assessing the effectiveness of this option, the deeper potential inflows 
created  by  a  mass  retail  regime  must  be  balanced  against  the  dilution  of  impact  due  to  the 
redemption  rules.  This  is  because  liquidity  management  may  reduce  the  extent  to  which  a 
fund would be able to concentrate solely on long term assets of an illiquid nature. Instead of 
having the possibility to invest up to 100% in long-term assets, the fund would need to have 
at least 30% of liquid assets. Returns on long term assets typically offer illiquidity premiums, 
attractive for investors seeking better returns that are able to lock up their investments for the 
long  term.  Introducing  redemption  rights  could  dilute  these  expected  returns.  Should  the 
return  be  lower  than  with  a  traditional  long-term  closed-ended  fund  investing  in  the  same 
assets, it is not granted that institutional investors would invest. Some institutional investors 
might  prefer  to  invest  in  'pure  breed'  long-term  asset  funds  that  do  not  permit  regular 
redemption  in  order  to  maximize  their  return  (See  Section  3.2.3  for  anticipated  returns 
associated with long-term asset classes). This could reduce take up, and dilute impact. 

As described, these rules aim to achieve a trade-off between redemption needs and long-term 
commitments. Some investments might nevertheless not be most efficiently realized under a 
'redemption-rights'  structure.  For  instance,  a  "greenfield"  infrastructure  project  requires 
several years to develop and build prior to yields becoming available. Its eventual transition to 
a  "brownfield"  infrastructure  asset  requires  a  patient  long-term  investor  base.    If  the  fund 
manager  cannot  rely  on  such  an  investor  base,  he  might  forgo  the  "greenfield"  investment 
opportunity. This initial phase can last more than 10 years in some cases, and for such time 
horizons  the  stake  acquired  in  the  project  might  be  blocked  from  being  exchanged  in  a 
secondary market. For these reasons it may be challenging for a manager to reconcile the need 
to ensure annual redemptions with a very large stake in its portfolio in an asset that cannot be 
sold. This would imply that funds targeting retail investors might concentrate more on those 
illiquid  assets  that  entail  smaller  stakes,  shorter  commitments,  or  where  there  is  some 
expectation for residual liquidity through a secondary market if needed. 

Impact on investors: This option builds on option 6, but provides investors with redemption 
rights. In practice the investors would have the annual right to ask for redemption directly by 
the fund, following a lock-in of three years. These rights are matched with targeted liquidity 
management measures to ensure they can be supported. The lack of liquidity in the portfolio 
assets would be managed through the use of a 30% liquidity buffer as a liquidity management 
tool. Instead of representing a maximum for investing in liquid assets as under the options 4 
to 6, the funds  would be required to hold at least 30% of liquid assets  in their  portfolio. In 
order to maintain a long-term profile of the fund, the minimum investment in long-term assets 
would be set, e.g., at 60%.  

The broad liquidity profile of different types of long term asset varies. For example, property 
assets can more readily accommodate redemption rights. It is common for property funds to 
offer  daily  redemption  rights.  On  the  other  hand  investments  in  companies  or  infrastructure 
projects benefit from a less developed secondary market and are therefore almost only offered 
via  closed-ended  funds.  The  proposed  annual  redemption  policy  represents  however  a 
compromise  allowing the LTI  funds to seek exposure to a mix made up of all  of the  above 

53  

See Annex 2 

EN 

41 

   EN 

 
                                                 
sectors. For example, a sufficiently diversified portfolio combined with deep enough liquidity 
buckets  (at  least  30%),  could  permit  a  manager  to  accommodate  annual  redemption  rights 
even where a certain proportion of its portfolio remains invested over a fixed maturity of 10 
years. Additionally managers should be permitted to use ‘gates’ so that they have the time to 
find new investors to replace those that are redeeming their investments. A fund could thereby 
maintain liquidity without reducing its size. These mechanisms could be complemented by a 
temporary use of borrowing facility in order to support redemption requests in extremis. 

This  residual  liquidity  could  raise  the  attractiveness  of  the  fund  both  for  retail  and  some 
institutional investors. Some investors that are reluctant to invest in closed-ended funds might 
decide to invest in this asset class due to the redemption rights. Under this option the risks for 
retail  investors  investing  in  LTI  without  fully  measuring  the  illiquidity  consequences  of 
closed-ended funds would be diminished.  

This  argument  is  however  counterbalanced  by  the  fact  that  LTI  funds  ensuring  regular 
redemptions  are not exempt from illiquidity risks. The assets in which the fund is investing 
might  lose  all  liquidity  while  the  fund  faces  strong  redemption  request,  particularly  in  the 
context of a run on the fund whereby redemptions cannot be netted against subscriptions. In 
these  cases  even  a  30%  buffer  of  liquid  assets  might  be  insufficient  to  ensure  the  adequate 
levels  of  liquidity.  Investors  invest  in  open-ended  funds  on  the  basis  that  they  can  redeem 
when  they  decide  to  do  so.  Even  where  disclosures  are  clear  that  there  can  be  extreme 
circumstances in which redemption are suspended, there would be significant loss of trust and 
confidence  in  the  sector  were  such  suspensions  to  occur.54  The  impact  of  suspensions  or 
losses might be particularly material given that access to long term savings might be crucial 
for  retail  investors  precisely  at  the  time  that  market  distress  might  lead  to  a  surge  in 
redemption requests. 

The proposed techniques that could be  used  for  helping to create liquidity, such as gates or 
borrowing  facilities  are  not  without  risk  for  the  investor.  For  example  a  borrowing  facility 
creates leverage, increasing risks for remaining investors both in relation to the borrowing and 
in  relation  to  their  increased  exposure  to  the  underlying  (potentially  distressed)  assets. 
Remaining investors in effect have to pay for the redemption of leaving investors, raising the 
need to ensure rules on equitable treatment of investors in such circumstances. 

Another aspect relates to the investment focus of the fund. Too much flexibility could reduce 
clarity for investors, particularly retail and small institutional investors who could be confused 
over what LTI funds offer.  

Impact  on  managers:  The  manager  would  have  the  same  impacts  as  under  option  6 
concerning the impacts of a retail framework and product rules. These impacts are however 
supplemented by the fact that the manager would need to ensure redemption rights. This will 
increase the running costs of the funds because the manager will need to actively manage and 
rebalance the portfolio on a frequent basis whereas the management of closed-ended funds do 
not require any specific management during the life of the fund. 

Some  stakeholders  have  proposed  to  introduce  initial  lock-up  periods  that  would  limit  the 
redemption  possibility  during  the  first  3  years  for  example.  Any  investor  that  would  like  to 
redeem during this period would have to pay penalty fees. While this solution might represent 
an  added  flexibility  for  the  manager  to  invest  and  build  his  fund  more  easily,  it  does  not 
completely exclude the fact that no investor will ask for redemption.  

54  

See Annex 3.2 

EN 

42 

   EN 

 
                                                 
Another risk is that some managers, especially from the infrastructure sector (according to the 
consultation  results),  might  decide  not  to  propose  such  LTI  funds  with  redemption  rights 
because it does not coincide with their usual business model or because their investments do 
not fit in such a structure. This would limit the take-up of such a fund. 

To allow for redemptions, 70% of respondents to the consultation question were in favour of 
introducing  minimum  liquidity  constraints,  while  18%  were  of  the  opinion  that  such 
constraints are not necessary. Some suggested that liquidity constraints could be regular, but 
less  frequent  than  the  valuation/redemption  cycles  mandated  in  UCITS,  these  respondents 
were  in  favour  of  offering  less  frequent  redemption  opportunities  to  investors.  Some 
respondents proposed an early redemption facility for retail investors only. According to these 
respondents,  this  would  entail  the  formation  of  semi-open  fund  structures  that  enable 
investors  to  redeem  their  units  at  regular  intervals,  though  ones  far  longer  than  those  in 
UCITS.  

A  respondent  representative  of  retail  investors  argued  that  the  liquidity  provided  by  a 
secondary  market  might  be  an  essential  feature  for  an  efficient  and  safe  market  for  retail 
investors.  

95%  of  the  respondents  to  the  consultation  question  were  of  the  opinion  that  for  a  fund 
offering redemption rights, minimum lock-up periods or other restrictions on exits should be 
permitted.  This was due to the illiquid nature of long-term investment funds and the need to 
protect the interests of all investors. Several respondents argued that a balance needed to be 
struck between the interests of investors and those of fund managers.  

Although  a  clear  majority  of  the  respondents  favoured  minimum  lock-up  periods  and  other 
restrictions, the options put forward by the respondents varied widely. Concern was expressed 
about  the  protection  of  investors  remaining  in  a  fund  in  order  to  ensure  that  these  are  not 
disadvantaged by redeeming investors’ use of liquidity.  

One respondent favoured yearly redemption rights after a lock-up period of a few years. This 
could be supported by exit penalties that gradually decrease over the holding period. 

As  to  the  minimum  investment  period,  views  expressed  by  respondents  ranged  from  one 
month  to  a  multi-year  lock-up  period,  with  options  ranging  from  six  months  to  one  or  two 
years also being mentioned. One public authority argued that retail investors should never be 
bound for a long period of time. Respondents from both investors and the industry were of the 
opinion that, in the event of a regime open to retail investors, parameters should be defined to 
ensure retail investors can redeem in the event of unforeseeable circumstances. 

Bilateral  discussions  with  selected  firms  operating  in  the  closed-ended  LTI  market  have 
indicated  that  in  their  view  redemption  rights  are  necessary  for  retail  access;  attempts  to 
achieve liquidity through listing funds on secondary markets did not, in their view, adequately 
address liquidity needs of retail investors. Institutional investors (AF2i) also stress the need to 
have a legal environment that creates solutions to prevent the illiquidity risk, for example in 
organizing legal ways of selling or transmitting assets. 

6.2. 

Impact summary 

Overview of the product rules for options 4 to 7 

Option 4 

Option 5 

Option 6 

Fund’s type 

Closed-ended 

Closed-ended 

Closed-ended 

LTI portfolio 

Min 70% 

Min 70% 

Min 70% 

Option 7 
Annual redemption 
after 3y lock-up 
Max 70% / min 

EN 

43 

   EN 

 
 
 
 
 
Eligibility rules 
Diversification 
rules 

Cost transparency 

Use of derivatives 
Cap of leverage 
Rules on conflict of 
interest 

Yes 

Flexible 

Yes 

Flexible 
No 

No 

Yes 

Flexible 

Yes 

Flexible 
No 

No 

Yes 
Min 10 issuers, 
capped at 25% 
Yes, including 
distribution fees 
Only hedging 
Yes 

70% in liquid assets 
Yes 
Min 10 issuers, 
capped at 25% 
Yes, including 
distribution fees 
Only hedging 
Yes 

Yes 

Yes 

Option 1 cannot be retained as it would not address the problems of a lack of single market or 
the  lack  of  a  common  LTI  definition.  Investors  will  continue  to  face  patchy  national 
frameworks and buy funds that may or may not be conduits for LTI without knowing how far 
these contain long term assets or where the funds are not fully efficient for such investments. 
Managers  will  not  see  barriers  falling  when  selling  their  funds  abroad  and  real  economy 
actors will continue to lack the financial resources that would be otherwise available from the 
asset management space. 

Option  2  would  only  marginally  improve  the  current  situation  by  encouraging  some 
convergence  in  the  definition  of  long  term  assets  and  an  LTI  fund  label.  But  the  identified 
problems  would  to  a  large  extent  remain  unaddressed,  as  under  option  1.  Option  2  would 
certainly not address the issue that a suitably diversified LTI vehicle is not available for retail 
investors  or  those  institutional  investors  that  derive  additional  comfort  in  investing  in  a 
product suitable for retail.  

Option 3 has the benefit of tackling barriers to LTI by retail investors, but risks to undermine 
the UCITS brand, confuse investors, and would still be relatively diluted in impact on LTI. It 
would not be effective at creating a common understanding of what constitutes an LTI funds. 

Options 4 and 5 are very similar: they would  be  more effective than option 2 at fostering a 
common understanding of what constitutes an LTI fund and, by creating economies of scale 
in the production and marketing of LTI funds, reduce management and investor negotiation 
costs. However, Options 4 and 5 would not tackle barriers to retail investment in LTI funds.  

Options 6 and 7 would be more effective in removing the barrier to retail investment in LTI 
funds, ensuring much wider access to such funds. Both would be capable of bringing greater 
clarity on what constitutes LTI funds and what are its eligible asset categories. Additionally 
both options will create strong and harmonized product rules aimed at reducing the potential 
of mis-selling practices. 

Option 6 is chosen in preference over Option 7 because regular redemptions cannot 
be reconciled with the largely illiquid nature of the asset classes that are qualified as 
long-term  assets  eligible  to  be  held  in  a  LTIF  portfolio.    Participations  in  unlisted 
entities operating, e.g., infrastructure projects, motorway concessions or a network of 
hospitals are, by their very nature, hard to trade.  The same holds true for stakes in 
unlisted  SMEs,  investments  in  social  infrastructure  or  direct  holdings  in  real  assets 
(such  as  ships,  aircraft  or  rolling  stock).  The  lack  of  liquidity  marking  these  asset 
classes  stems  from  the  fact  that  the  LTIF  manager,  after  the  conduct  of  extensive 
due  diligence,  will  have  selected  portfolio  assets  in  light  of  their  intrinsic  risk  and 
return profiles so as to match the specific expectation of its LTIF investors.  Portfolio 
assets will thus invariably reflect the outcome of tailor-made diligence processes. In 
these  circumstances,  portfolio  assets  that  comply  with  the  risk  and  return  profile  of 
one  particular  LTIF  cannot  necessarily  be  traded  to  other  investors  or  other 

EN 

44 

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specialised  LTIF  funds.    This  implies  that  individually  selected  project  participations 
or participations in individual non-listed companies cannot be sold to other investors 
within  the  often  short  timeframes  necessary  to  meet  spontaneous  redemption 
requests. 

In light of the fact that most LTIF portfolio assets will reflect idiosyncratic choices by 
the respective LTIF managers, it is also unlikely that a highly liquid market for such 
assets will emerge in the foreseeable future. In light of this, preference was given to 
align the investment horizon of the LTIF fund with that of its investment assets and, in 
consequence, not to promise LTIF investors a liquidity profile that cannot be ensured.  
The  promise  of  early  redemptions  to  either  all  or  selected  investor  categories  was 
therefore  held  to  lead  to  expectations  that  would  invariably  not  be  fulfilled  and  a 
dilution of the LTIFs orientation toward long-term assets.   

The  preference  for  Option  6  also  reflects  the  concern  that  an  untenable  liquidity  or 
redemption  promise  will  also  have  detrimental  repercussions  on  the  image  of  the 
newly  created  category  of  LTIF  funds.  An  early  incident  involving  a  redemption 
request that cannot be met with relative ease would have highly detrimental impacts 
on the emerging market for investments in LTIF funds. On balance, take-up of such 
funds  might  be  severely  limited  if  an  early  incident  involving  unfulfilled  redemptions 
would 'hit the headlines' thus undermining confidence among investors.   

Finally  -  even  if  a  secondary  market  could  be  found  for  the  above  described  long-
term asset classes - spreads in these markets will be very wide. Wide spreads reflect 
the  illiquidity  of  these  asset  classes.  The  risk  therefore  arises  that  redemption 
requests would force the LTIF managers to sell assets at large discounts. Also, early 
redemptions  might  force  the  manager  to  sell  the  relatively  more  liquid  assets  in 
preference over the even less liquid ones in a LTIF portfolio. These kind of 'fire sales' 
would not only severely impact the net asset value of the LTIfs portfolio (which would 
decline rapidly) but would also leave investors that remain in the LTIF stranded with 
the least liquid portfolio assets.  According early redemption opportunities would thus 
not  only  diminish  the  returns  achieved  by  the  LTIF  but  would  also  raise  complex 
issues  around  the  equal  treatment  of  LTIF  investors.    Not  unlike  the  analysis 
contained  in  the  impact  assessment  on  money  market  funds,  early  redemption 
opportunities might foster a culture of early redemption which easily transforms into a 
run  once  it  becomes  clear  that  the  LTIF  is  caught  in  a  desperate  effort  to  divest  its 
most liquid assets on the secondary market.   

In light of all of the above considerations, this impact assessment expresses a strong 
preference  for  an  LTIF  fund  that  treats  all  investors  equally  by  not  offering 
opportunities for early and potentially opportunistic redemptions. 

Each  option  is  rated  between  "---"  (very  negative),  ≈  (neutral)  and  "+++"  (very 
positive) based on the analysis in the previous sections. The benefits are, however, 
not  quantified  in  monetary  terms,  as  this  is  not  possible  on  an  ex  ante  basis.  The 
costs should be understood in a broad sense, not only as compliance costs but also 
as all the other negative impacts on stakeholders and on the market. This is why we 
have  assessed  the  options  based  on  the  respective  ratio  of  costs  to  benefits  in 
relative  terms.  The  assessment  highlights  the  policy  option  which  is  best  placed  to 
reach  the  related  objectives  outlined  in  Chapter  4  which  is  therefore  the  preferred 
one. 

EN 

45 

   EN 

 
Policy options 

1 No action 

2  LTI 
Label 

fund 

3 Long term 
assets in UCITS 

4 LTI fund for 
institutional 
investors 

5 LTI fund for 
institutional 
investors and 
HNWI 

6 LTI fund retail 
passport with no 
redemptions 

7 LTI fund retail 
passport with 
redemptions 

Impact on stakeholders 

Effectiveness 

Efficiency 

0 
(+) investors will benefit from a 
higher harmonization of the 
definition of long term assets  
(--) managers will continue to 
face national barriers to 
marketing their funds 
(+) retail investors gain limited 
access to long term assets 
(+) managers of UCITS able to 
diversify offerings 
(---) may undermine 
clarity/trustworthiness of 
UCITS brand for investors 
(+) common legislative 
definition  reduces costs for 
fund managers  
(+) institutional investor access 
to easily identified LTI funds 
widened 
(-) no retail investor access, 
subject to national rules  
(+) common legislative 
definition  reduces costs for 
fund managers  
(+) institutional and qualified 
investor access to easily 
identified LTI funds widened 
(-) no retail investor access, 
subject to national rules 
(+) common legislative 
definition  reduces costs for 
fund managers  
(+) access granted for all 
investors 
(-) possible retail detriment if 
risks / lack of redemption rights 
not understood 
(-) lack of redemption rights 
may limit attractiveness for 
mass retail market 
(+) common legislative 
definition  reduces costs for 
fund managers  
(+) access granted for all 
investors 
(--) possible retail detriment if 
risks / lock-in profile not 
understood 
(+) redemption rights may 
increase attractiveness for mass 
retail market 
(--) possible retail detriment 
where redemptions are 
suspended 

0 

(+) creation of a common 
definition of long term assets 
(--) incapable of addressing 
national fund divergences 

0 
(--) low implementing 
costs but low results 

(-) common definition of 
LTI not so clear, given 
UCITS focus on liquidity 

(--) negative impact on 
UCITS brand could 
strongly outweigh 
other impacts 

(+) increased harmonisation 
over content of LTI funds 
(-) take up likely to be lower 
if limited to institutional 
investors 
(≈) single market established 
for institutional investors 

(+) increased harmonisation 
over content of LTI funds 
(-) take up likely to be low if 
limited to institutional / 
qualified investors 
(≈) single market established 
for institutional / qualified 
investors 
(++) increased 
harmonisation over content 
of LTI funds 
(++) higher take up across 
institutional markets 
(+) opens take up across 
retail markets 
(++) single market 
established for all investors 

(++) increased 
harmonisation over content 
of LTI funds 
(++) higher take up across 
retail markets 
(-) less take up across 
institutional investors 
(++) single market 
established for all investors 
(--) redemption rights dilute 
focus of funds purely on LTI 
investments 

(+) the fund regime 
would not reach its 
optimal situation with 
only institutional 

(+) the fund regime 
would benefit from a 
solid client base but not 
sufficient to ensure its 
prosperity 

(++) fund regime 
would have deeper 
capital basis by 
targeting all investors, 
but lack of redemption 
rights may reduce take 
up for retail 

(+) fund regime would 
achieve its optimum in 
targeting all investors, 
but liquidity mismatch 
due to need to meet 
redemption undermines 
efficiency and raises 
risks of liquidity 
crunch 

EN 

46 

   EN 

 
 
 
 
 
 
 
 
 
 
7. 

THE RETAINED POLICY OPTION AND ITS IMPACT 

Based on the analysis above, the most efficient and effective policy option is option 6, which 
is therefore retained. 

New product rules would be established for LTI funds which would be open to all investors 
across  the  EU  (retail  fund  passport).  Product  rules  would  address  diversification,  maximum 
exposure to a single issuer (project), transparency, use of leverage and derivatives, conflicts of 
interests. The fund rules will not provide any redemption rights. 

Transparency requirements would warn investors as to the need to hold investments into the 
funds to maturity, but outline the limited redemption rights that may be provided.  

7.1. 

The choice of instrument 

The  proposed  legislative  measure  aims  at  ensuring  harmonization  of  the  single  market  in 
relation to managers’ activities involving a specific type of fund (LTI fund), setting up rules 
on the specific characteristics of such LTI funds.  

In  pursuit  of  this  objective  the  proposed  legislative  measure  will  create  a  regulatory 
framework for LTI funds in order to ensure better cross border marketing of LTI funds. The 
provisions  envisaged  will  deal,  among  others,  with  the  scope  of  eligible  assets,  with 
diversification  rules,  rules  on  transparency  about  the  product  and  rules  related  to  liquidity 
management. These are product rules that aim at making the European LTI fund market more 
harmonized and efficient so as to ensure a proper functioning of the single market. 

Currently there are no specific rules for LTI funds laid down in EU law. This results in large 
divergences and legal uncertainty as to what constitutes an LTI fund investment. This creates 
an un-level playing field, impeding the smooth functioning internal market.  

Defining LTI funds at the EU level would reinforce the envisaged designation of an LTI fund 
by ensuring it was more dependable and consistent across the EU, and would reduce possible 
impacts  of  regulatory  arbitrage  between  Member  States.  This  consideration  is  further 
compounded  by  the  need  to  ensure  investor’s  safety,  which  is  better  attended  by  having  a 
uniform set of rules determining essential characteristics of an LTI fund.  

Fund  managers  would  be  subject  to  relevant  management  rules  (as  set  out  separately  in 
UCITS  and  AIFMD),  reflecting  the  nature  of  the  assets  under  their  management,  and 
reflecting also the types of investor they are targeting..  

In  view  of  the  objectives  of  the  current  proposal,  a  directive  may  not  be  the  most  efficient 
choice  of  instrument  because  a  proposal  regulating  the  essential  features  of  an  LTI  fund 
requires  that  the  legislative  framework  is  applied  throughout  the  EU  with  exactly  the  same 
scope, without any gold-plating and without national legislators adopting divergent rules so as 
to  continue  to  fragment  the  single  market  for  LTI  funds.  The  objectives  of  developing  a 
common  definition  of  long  term  assets  and  the  funds  that  invest  in  them,  and  removing 
barriers  to  a  single  market  for  such  funds,  require  uniformity  and  legal  certainty  as  to  the 
scope of application, the conditions of application, and the content of measures throughout the 
EU,  without  exceptions  or  diverging 
implementations  by  national  authorities  and 
jurisdictions. 

In addition, the measures considered in this report relate, in the most part, to the establishment 
of  a  uniform  definition  of  LTI  funds.  They  do  not  address  other  rights  or  obligations  of 
investment fund managers, where a directive might be the appropriate legal form.  

EN 

47 

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7.2. 

Estimate of likely uptake  

Given  the  retained  option  would  be  an  elective  approach  –  fund  managers  would  choose 
whether or not to take up the new options – estimating the scale of uptake is difficult ex ante.  

Uptake depends in the first instance on fund managers deciding to take up the new options. 
This  decision  is  directly  linked  to  the  perceptions  of  fund  managers  of  interest  from  both 
institutional and retail investors. Ultimately uptake over the longer term will be determined by 
sustainable demand from investors. This will also reflect the difficulty of estimating macro-
economic developments that impact investor flows between asset classes. 

As  set  out  in  the  summary  table  under  section  6.2,  tackling  barriers  to  access  for  retail 
investors  in  principle  opens  up  the  deepest  capital  pools.  This  is  due  to  both  direct  and 
indirect impacts. Directly, retail investors add a new capital source that is currently hindered 
by the lack of a single market for such investors. Indirectly, the success of UCITS as a vehicle 
in  institutional  markets  reflects,  amongst  other  factors,  the  high  density  of  product  rules 
contained in the UCITS Directive.   

Estimates of the scale of new activity by the fund managers and interest from investors vary 
strongly  depending  on  what  proxies  are  used.  For  instance,  if  infrastructure  is  taken  as  a 
proxy, and the volume of assets under management in the EU evolved so as to be similar to 
that in the US,  this  would  see  a doubling of the current market. Even in the developed real 
estate market, the European Public Real Estate Association (EPRA) estimate that the EU Real 
Estate Investment Trust (REIT) market of €300 billion assets under management perhaps has 
room to double in size in upcoming years.55 

Another possible proxy would be to see how the market might grow if cross-border business 
approximated  that  of  UCITS,  where  20%  of  fund  activity  is  cross-border.  The  Commission 
Impact Assessment on the Venture Capital market estimated growth of 8% might be possible 
from  tackling  these  barriers,  compared  with  existing  levels  of  cross-border  business, 
amounting to €4.2 billion additional funding for Venture Capital.56 The EU private equity and 
venture  capital  markets  overall  amount  to  €539  billion  assets  under  management,  of  which 
Venture Capital represents €65 billion. 57 

However,  any  estimates  are  subject  to  uncertainty.  In  this  case,  arguably,  take  up  might  be 
stronger  than  anticipated  from  normal  market  developments.  Experience  with  the  UCITS 
framework shows that if a framework can establish the trust of the markets and recognition 
for its strength and relevance for investors, then it can rapidly develop. It can become a focal 
point  for  investors,  and  also  a  focal  point  for  other  regulatory  activities,  including  national 
measures on tax, that may further deepen impacts. On the other hand, if the framework does 
not meet the needs of investors and fund managers, then take up could be very low. 

On  balance,  offering  a  LTIF  with  no  redemption  opportunities  is  deemed  to  best  reflect  the 
required long-term commitment – often referred to as the need to attract 'patient capital'. This 
is the reason why a two tier approach, while attractive as a theoretical model, was not deemed 
to  be  workable  in  practice.    A  two-tier  approach  –  by  promising  retail  investors  regular 
redemption opportunities while not providing this promise to professional investors – would 
invariably oblige the LTIF manager to, in permanence, manage the unpredictable redemption 
desires of its retail investor base and adjust the liquidity of the LTIF investment portfolio in 
line  spikes  in  redemption  requests  among  the  retail  segment  of  its  investors.  The  fact  that 

55  
56  
57  

See above p. 12. 
Impact Assessment on Venture Capital Funds, p. 60. 
EVCA Yearbook 2012 p. 63 for estimate of base market size. 

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redemption desires by retail investors are more often than not influenced not by the economic 
cycle but rather by personal circumstances makes their potential redemption behaviour even 
harder to predict and to manage. In essence, a two tier approach would introduce one of the 
most  complex  and  intractable  versions  of  what  is  commonly  known  as  a  'know-your-
customers' policy.   

Apart  from  being  an  extremely  burdensome  form  of  LTIF  management  –  as  it  requires 
continuous monitoring of possible redemption patterns among retail investor base – the two-
tier approach would, in essence, reduce the LTIF managers' discretion to focus on long-term 
asset classes. This is because the two tier approach would introduce a bias toward more liquid 
portfolio  assets  that  are  chosen  because  of  their  greater  trading  potential  in  preference  over 
their  long-term  potential  to  appreciate  in  value  or  their  long-term  potential  of  producing 
regular and predictable yield during the lifetime of the investment. It is thus held that a two 
tier  approach  would  have  a  detrimental  impact  on  the  return  profile  of  the  LTIF  –  a 
consequence that appears incompatible with the desired focus on maximising returns; a focus 
that can often only be achieved at the cost of very long holding periods that are rarely shorter 
than  10  years.    This  IA  therefore  concludes  that  the  two  tier  approach  is  fundamentally 
incompatible  with  the  type  of  long-term  holding  periods  that  are  necessary  to  maximise  the 
potential of achieving the extra yield associated with illiquid investments (cf. the performance 
data provided in Section 3.2.3 of this IA). 

7.3. 

Substitution and distributional effects 

Where there is a  successful  take up of LTI funds, substitution  effects (where do investment 
inflows  come  from?)  and  distributional  effects  (which  fund  managers  or  jurisdictions  will 
benefit the most, and who might be impacted negatively?) might arise. 

Substitution effects 

A  new  LTI  fund  regime  would  draw  investments  from  those  currently  investing  in  UCITS 
funds and from those currently investing in other existing LTI instruments including national 
funds.  It would also, as a new fund opportunity for investors unable currently to target LTI 
funds, generate additional investments.  

It is difficult to assess the balance between these different elements. Substitution for UCITS 
investments by retail investors is not likely to be great, as the investment profile of LTI funds 
would be significantly different to UCITS, and the proportion of individual portfolios suited 
to long term commitments might be relatively small given the need for households to retain 
liquidity  in  their  overall  investment  portfolios.  For  those  investors  already  making 
investments into alternative asset classes, including retail, mass affluent and HNWI investors, 
and institutional investors, LTI funds might substitute for some of these other vehicles – e.g. 
structured instruments, or AIFs. Given that LTI funds would channel investments to long term 
assets, and these other vehicles are rather more diffuse and varied in their asset allocations, 
increased  allocations  to  LTI  funds  would  of  course  be  expected  to  increase  overall  funding 
available to long term assets.  

For  institutional  investors  currently  not  holding  long  term  assets  or  where  such  assets  are 
under-represented  on  their  portfolios,  a  flourishing  LTI  fund  market  would  make  such 
investments  easier,  more  transparent  and  cheaper.  Asymmetries  of  information  would  be 
reduced.  The  availability  of  transparent  vehicles  targeting  LTI  that  are  known  to  be  well 
regulated  can  therefore  be  expected  to  increase  institutional  allocations  to  long  term  assets. 
This might see a minor redistribution move away from shorter-term liquid assets (short term 
bonds,  and  to  a  lesser  extent  equities),  towards  longer-term  assets.  Even  small  shifts  in 

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institutional portfolio allocations could have strong impacts on LTI markets given the scale of 
these portfolios.  

Distributional effects (between different fund markets) 

A new LTI fund regime could be expected to increase capital available to peripheral markets 
in the EU and investment opportunities for investors in those markets. From the perspective 
of the investment target, deeper capital pools (taken from across the EU), could likely permit 
further  specialisation  and  differentiation  in  fund  offerings,  including  vehicles  targeting 
markets so far underdeveloped due to the collective impact of market fragmentation. From the 
perspective of the investor, an LTI fund framework with passporting rights could make such 
investments available to all investors across the EU. This could replace a situation in which 
options for such investments are only available in certain markets for certain investors. 

Benefits for the core markets in the EU might be expected to be less marked, to the extent that 
these markets already have access to national fund regimes. However fragmentation in these 
regimes  and  patchy  focus  on  LTI  means  that  even  in  these  core  markets,  increased  capital 
flows to LTI funds would be expected to increase funding for long term assets compared to 
existing national funds. A deeper capital pool for LTI funds would, as noted, permit deeper 
differentiation and specialisation in that fund market, thereby permitting investment types that 
are currently most constrained to develop further. This may be particularly the case in relation 
to more risky greenfield investments. 

New  economies  of  scale  and  benefits  for  existing  players,  driven  by  new  market 
opportunities,  could  benefit  dominant  EU  fund  domiciliation  jurisdictions  (Luxembourg, 
Ireland, France, UK, Germany). However, the regime might also be expected to permit new 
entrants to the market, increasing competition. 

7.4. 

Impact on EU fund legislation 

The  choice  to  create  a  single  investment  vehicle  that  can  accommodate  a  variety  of 
investment  strategies  is  the  default  choice  in  EU  fund  legislation.  For  example,  the  hugely 
popular  UCITS  framework  creates  a  single  set  of  rules  covering  investment  policies 
(diversification,  risk  exposure)  or  safekeeping  that  can  accommodate  investment  strategies 
involving shares, bonds, money market instruments or strategies based on tracking diversified 
and  widely  recognised  indices.  Likewise,  the  UCITS  framework  can  also  accommodate  so-
called 'mixed' funds which engage in a mixture of the above mentioned investment strategies. 
The  drafters  of  the  UCITS  framework  have  rightly  refrained  from  creating  sector  specific 
rules  for  share  funds  vs.  bond  funds.  They  have  also  refrained  from  creating  a  special  fund 
category for 'mixed' funds. This is because the general UCITS framework creates a single set 
of  rules,  e.g.,  on  diversification  or  exposure  limits,  which  are  valid  for  all  investment 
strategies.  

Equally,  the  more  recent  AIFM  Directive  establishes  a  uniform  framework  that  comprises 
managers  of  a  variety  of  alternative  investment  funds,  ranging  from  hedge  funds,  private 
equity  operators,  real  estate  funds,  funds  investing  in  distressed  securities  and  those  that 
specialise in commodities. While the AIFM Directive comprises a large variety of alternative 
asset  classes,  the  single  approach  is  justified  because  the  AIFM  Directive  essentially  limits 
itself to regulating those features of the above mentioned alternative fund managers have in 
common – e.g., the difficulty to reliably value non-listed asset classes, the need to establish an 
independent valuation, the need to evaluate the recourse to leverage at fund level, the need to 
eventually cap leverage if it becomes systemically relevant. 

The envisaged LTIF model follows this inclusive approach. The chosen approach is to create 
a  single  vehicle  that  contains  generic  rules  on  the  investment  policies  of  all  ELTIFs, 

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regardless  of  whether  these  LTIFs  specialise  in  infrastructure  investment,  investments  in 
unlisted  SMEs  or  in  airplane  or  marine  financing.  For  example,  the  envisaged  rules  on 
investment policies (portfolio composition and diversification, concentration limits, limits on 
cash  borrowing)  or  the  envisaged  rules  on  redemption  policies  are  designed  to  apply  to  all 
categories  of  LTIF,  whether  they  specialise  in  providing  equity  participations  for 
infrastructure  or  whether  they  invest  in  real  assets  directly  (airplane  or  ship  finance).  This 
approach  also  makes  eminent  sense:  risk  spreading  is  necessary  in  the  case  of  providing 
equity to a variety of project companies as well as when investing in real assets. Equally, rules 
against leverage at the fund level appear necessary for all types of LTI strategies that an LTIF 
may wish to pursue.  

In addition, certain overriding commonalities displayed by all long-term asset classes militate 
in favour of a single vehicle. As set out in this report (notably Box 1 'overview of long-term 
asset classes'), the overriding feature that unites long-term assets is their lack of liquidity and 
the  difficulty  to  divest  these  assets  at  short  notice  by  finding  a  trade  buyer  on  so-called 
'secondary markets'. Their second common feature is that uncorrelated and supra-competitive 
yield (when compared to shares and bonds) can only be achieved when these assets are held 
for  comparatively  long  periods  (usually  not  shorter  than  a  decade).  It  therefore  appears 
eminently suitable to provide for common rules on redemption policies, alignment of the LTIs 
lifecycle with that of its underlying investments, trading of LTIF shares on secondary markets 
and the orderly disposal of portfolio assets prior to the winding up of the LTIF fund. These 
sets of rules must, by necessity, apply irrespective of the long-term asset class that any given 
LTIF has chosen to invest in.  

In light of the above, this report aims to continue with the well-established policy of creating a 
single fund vehicle for a comparable set of asset classes. 

7.5. 

Impact on SMEs 

The creation of an LTI fund would have indirect impacts for the financing of SMEs. SMEs 
represent  one  of  the  core  assets  in  which  the  LTI  funds  will  be  able  to  invest.  This  can  be 
achieved  either  by  providing  loans  or  by  acquiring  equity  participations  in  the  companies. 
SME financing  varies by  phase of development.  Typically these companies rely  on  private 
financing  for  driving  growth  and  expansion,  given  the  costs  or  barriers  to  public  financing. 
Banks are a main source of such financing, but as set out also in the VC impact assessment,58 
investment  funds  have  a  key  potential  role  to  play.  The  cost  of  funding  for  a  SME  is 
fundamental for undertaking new development projects. Should the cost of funding decrease, 
SMEs  will  be  able  to  undertake  new  projects  and  more  readily  grow.  The  creation  of  pan-
European LTI funds will not address all of the challenges SMEs face in accessing financing, 
but it can contribute to a wider range and depth of alternative sources of financing, alongside 
banks. As described in the previous sections, a common LTI fund framework has the potential 
to create economies of scale and increase the money going into long-term assets. Should the 
money  invested  in  LTI  funds  increase,  it  is  likely  that  SMEs  would  benefit  from  cheaper 
financing possibilities. This is particularly the case given that investments into SMEs would 
be eligible investments for these funds. 

7.6. 

Social impact 

Nothing would suggest that the proposed policy will have any direct impacts on social issues. 
An  indirect  impact  might  however  relate  to  the  financing  of  social  housing  projects.  Social 

58  

http://ec.europa.eu/internal_market/investment/docs/venture_capital/111207-impact-assessment_en.pdf 

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housing  will  be  included  in  the  scope  of  eligible  assets  as  part  of  the  real  estate  category. 
Investment funds can provide financing to social housing projects or associations responsible 
of  managing  social  housing  properties.  As  underlined  in  a  UK  example,59  investment  funds 
can  replace  banks  for  providing  loans  to  housing  associations.  Just  in  the  UK  the  social 
housing needs are estimated at £20 billion over the next five years. Investment funds are best 
placed to offer solutions that substitute for bank financing. Another indirect impact might be 
on  the  employment  in  the  companies  that  attract  investment  from  LTI  funds.  By  providing 
financing to these companies, they could secure existing jobs or create new job opportunities.  

7.7. 

Environmental impact 

By increasing funding options for long term projects, it can be expected that a successful LTI 
fund regime would aid the development of environmental projects and sustainable growth. A 
wider range of financing may benefit marginal (more risky from a pure financial perspective) 
projects  more  than  core  (less  risky  from  a  pure  financial  perspective)  projects,  though  this 
would be a secondary impact depending on the nature of the projects targeted by LTI funds. It 
is difficult to measure the exact impact that LTI funds could have but as an example the LTI 
funds could represent an added value for helping to finance environmental projects where the 
issuance of bonds is too costly, as explained by the stakeholder Veolia in its response to the 
questionnaire. 

7.8. 

Impact on Member States 

The  creation  of  a  new  fund  framework  will  require  the  introduction  of  an  authorization 
procedure to be checked by the competent authorities of the Member States. This could raise 
additional  burdens  for  the  Member  States  that  do  not  already  have  such  authorization 
procedures in place. In addition these LTI funds will require continuous monitoring but this 
should  be  not  be  more  important  than  the  current  supervision  that  already  occurs  under  the 
current national law. 

Some additional burdens might impact ESMA that could be require to keep a central register 
of  all  authorized  LTI  funds.  ESMA  will  also  have  to  be  involved  in  the  usual  complaint 
resolution that arises in the application of single market law. 

Regarding  the  opinion  of  Member  States  on  possible  issues  on  compliance  with  any  new 
requirement, no specific views have yet been expressed. 

7.9. 

Impact on third countries 

The  new  LTI  framework  may  represent  an  added  value  for  potential  investment  targets 
domiciled in third countries. Should the focus on long term assets increase, it is to be expected 
that long term assets domiciled in third countries may also benefit from an increased demand.  

Finally the newly created LTI fund could represent an export label as UCITS does currently 
for  funds  invested  in  transferable  securities.  For  example  Asia  and  Latin  America  are 
important  export  markets  for  UCITS.  LTI  funds could  become  a  new  international  standard 
for the investment in non-transferable securities. As such investors outside the Union might as 
European investors benefit from this new framework.  

7.10.  Risks 

Given the need for retail investors to accept not to withdraw their money for a possible long-
period of time, transparency and  warnings related to the lack of liquidity  of these funds are 
vital.  

59  

“L&G offers social housing loans”, Financial Times, 01 July 2012 

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Any mis-selling of LTI funds to retail investors who do not understand this lack of liquidity, 
or events that would lead to strong needs for redemptions by retail investors, could undermine 
the development of the LTI fund market. Investor confusion as to the differences between LTI 
funds and UCITS could also lead to mis-purchasing of LTI funds.  

Should a fund be in the impossibility to redeem their investor at the agreed end of fund’s life 
due to the illiquidity of the assets contained in the portfolio, the investors would have to wait 
till  these  assets  can  be  sold.  This  type  of  event  is  probable  if  the  managers  do  not  start  to 
dispose of their assets early enough for ensuring redemption on time. Orderly disposal plans 
at the level of the manager will be needed to minimize the occurrence of these situations. 

The other risk is that the fund rules are too restrictive for fund managers, such that take up is 
weak and the new fund structure thereby does not reach a large enough size to outweigh the 
sunk  costs  for  active  participants  associated  with  putting  it  into  place.  This  risk  should 
however be counterbalanced by the fact that the manager will have the opportunity to market 
its  funds  to  all  investors  across  borders,  potentially  outweighing  the  constraints  attached  to 
product rules. 

8. 

MONITORING AND EVALUATION 

Ex-post  evaluation  of  all  new  legislative  measures  is  a  priority  for  the  Commission. 
Evaluations are planned about 4 years after the implementation deadline of each measure. The 
forthcoming  Regulation  will  also  be  subject  to  a  complete  evaluation  in  order  to  assess, 
among  other  things,  how  effective  and  efficient  it  has  been  in  terms  of  achieving  the 
objectives  presented  in  this  report  and  to  decide  whether  new  measures  or  amendments  are 
needed. 

In terms of indicators and sources of information that could be used during the evaluation, the 
data provided from the national competent authorities will be used. They are responsible for 
granting authorization to funds and as such they are able to know how many LTI funds are 
domiciled and marketed in their territory. Data from trade associations are another important 
source of information that can be used since associations such as EFAMA and EVCA collect 
European wide data on the asset management sectors they represent. Data providers such as 
Preqin  will  represent  an  additional  source  of  information,  especially  for  the  infrastructure 
sector. 

The  most  important  indicator  will  be  the  number  of  funds  that  have  adopted  the  LTI  fund 
rules.  With  this  number  it  is  possible  to  estimate  the  number  of  funds  that  operate  cross 
border. Another indicator will be the average size of the LTI funds: should this average size 
have increased this would mean that the LTI regulation has potentially created economies of 
scale. Inputs from investors will be necessary to evaluate whether the new LTI framework has 
created interesting investment opportunities for them. Finally it will be important to measure 
the proportion of funding that comes from investment funds in projects such as infrastructure, 
real  estate  and  companies.  If  the  proportion  of  funding  coming  from  investment  fund 
increases this would be an indicator that LTI funds have achieved their aim. Progress towards 
the objective to reduce the number of mis-selling cases will be assessed through the number 
of complaints and redress cases raised by investors. The competent authorities will play a role 
in monitoring these complaints. 

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ANNEXES 

ANNEXES ............................................................................................................................... 53 

1. 

2. 

3. 

3.1. 

3.2. 

3.3. 

4. 

4.1. 

Glossary ..................................................................................................................... 53 

Annex: National Fund Rules...................................................................................... 53 

Annex: Examples of Problems for Retail Investors................................................... 53 

Germany..................................................................................................................... 53 

UK .............................................................................................................................. 53 

Costs of investing in funds......................................................................................... 53 

Annex: Asset Classes ................................................................................................. 53 

Infrastructure projects ................................................................................................ 53 

4.1.1.  Description and market Size ...................................................................................... 53 

4.1.2.  Market players............................................................................................................ 53 

4.1.3.  Relevance for LTI ...................................................................................................... 53 

4.2. 

Property...................................................................................................................... 53 

4.2.1.  Description and market size ....................................................................................... 53 

4.2.2.  Relevance for LTI ...................................................................................................... 53 

4.3. 

Aircraft and maritime financing................................................................................. 53 

4.3.1.  Description and market size ....................................................................................... 53 

4.3.2.  Description and market size ....................................................................................... 53 

4.4. 

SMEs and larger companies....................................................................................... 53 

4.4.1.  Description and market size of the private equity...................................................... 53 

4.4.2.  Market participants in the private equity sector......................................................... 53 

4.4.3.  Debt participation....................................................................................................... 53 

4.4.4.  Relevance for the LTI ................................................................................................ 53 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

5.6. 

5.7. 

6. 

7. 

Annex: Market Overview of Existing National Fund Regimes for Illiquid Assets ... 53 

Luxembourg ............................................................................................................... 53 

United Kingdom......................................................................................................... 53 

Ireland ........................................................................................................................ 53 

Germany..................................................................................................................... 53 

The Netherlands ......................................................................................................... 53 

Italy - Real estate funds.............................................................................................. 53 

France......................................................................................................................... 53 

Annex: Feedback Statement from The Public Consultation ...................................... 53 

Annex: Feedback Statement from The Informal Questionnaire ................................ 53 

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1. 

GLOSSARY 

2013 Annual Growth 
Survey 

Action Plan to improve 
access to finance for 
SMEs  

Alternative Investment 
Fund (AIF) 

The Annual Growth Survey is intended to foster European economic policy 
coordination and to ensure that Member States align their budgetary and economic 
policies with the Stability and Growth Pact and the Europe 2020 strategy. It forms 
the basis for building a common understanding about the priorities for action at the 
national and EU level as the EU seeks to foster sustainable growth and job creation. 
The Annual Growth Survey feeds into national economic and budgetary decisions. 

A plan containing the various policies the Commission is pursuing to make access to 
finance easier for SMEs and to contribute to the growth of SMEs in Europe. 

A legal structure to pool assets and hold investments under the AIFMD. The 
AIFMD defines ‘AIFs’ as being collective investment undertakings, including 
investment compartments thereof, which (i) raise capital from a number of investors, 
with a view to investing it in accordance with a defined investment policy for the 
benefit of those investors; and  (ii) do not require authorisation pursuant to Article 5 
of the UCITS Directive (Directive 2009/65/EC). 
An AIF usually has no economic life on its own; the key decisions in relation to the 
management and marketing of AIF are taken by the AIFM. AIF span a wide range 
of legal structures, including closed and open-end funds. 

Alternative Investment 
Fund Manager (AIFM) 

The legal persons whose regular business is managing one or more AIFs under the 
AIFMD. Typical tasks include, for example, the provision of internal governance 
structures, risk management, the delegation of functions to third parties and relations 
with investors. 

Alternative Investment 
Fund Managers 
Directive (AIFMD) 

Directive 2011/61/EC of the European Parliament and of the Council of 8 June 2011 
on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 
2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010. The 
AIFMD lays down a prudential and supervisory framework applicable to managers 
of AIFs. 

Asset allocation 

A fund manager’s allocation of investment portfolios into various asset classes (e.g. 
stocks, bonds, private equity). 

Asset class 

A category of investment which is defined by the main characteristics of risk, 
liquidity and return. 

Assets under 
management (AuM) 

Brownfield 
infrastructure 

Closed-ended fund 

The value of assets that an investment company manages on behalf of investors. 

Unlike Greenfield infrastructure, Brownfield infrastructure describes an investment 
in an already existing or operating infrastructure project, such as the financing of an 
expansion to a wind farm. 

A collective investment undertaking with a fixed number issued shares. Once the 
fund is launched new shares are rarely issued. Redemption of shares held by 
investors in the fund are not permitted, but shares are normally exchanged on a 
secondary market directly between investors. Selling shares in some types of closed-
ended fund, like private equity, often requires consent of the fund manager. 

Collateral 

An asset or third party commitment used by the collateral provider to secure an 
obligation to the collateral taker. Collateral arrangements may take different legal 
forms such as by title transfer or pledge. 

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Competent authority 

Any organisation that has the legally delegated or invested authority, capacity, or 
power to perform a designated function.  

Connecting Europe 
Facility (CEF) 

A plan by the European Commission that fund €50 billion worth of investment to 
improve Europe’s transport, energy and digital networks. Such investments will 
focus on key infrastructure projects that are intended to create jobs and improve 
Europe’s competitiveness. 

Derivative 

Directive  

Diversification 

Europe 2020  

A type of financial instrument whose value is based on the change in value of an 
underlying asset. 

A legislative act of the European Union, which requires Member States to achieve a 
particular result without dictating the means of achieving that result. A Directive 
therefore needs to be transposed into national law contrary to regulation that have 
direct applicability. 

A risk management technique that aims to reduce risk by spreading investments in a 
variety of assets or counterparties. 

The EU's growth strategy for the coming decade. In addition to overcoming the 
crisis, Europe 2020 is intended to address the shortcomings of the growth model in 
the EU and stimulate growth that is smarter, more sustainable and inclusive. The EU 
has set five key objectives covering the sectors of employment, innovation, 
education, social inclusion and climate/energy, to be reached by 2020. Each 
Member State has adopted its own national targets in each of these areas. Concrete 
actions at EU and national levels underpin the strategy. 

European Securities and 
Markets Authority 
(ESMA) 

The European Securities and Markets Authority is the successor body to CESR, 
continuing work in the securities and markets area as an independent agency and 
also with the other two former level three committees.  

European Fund and 
Asset Management 
Association (EFAMA)  

European Social 
Entrepreneurship 
Funds (EuSEF)   

A private body that represents the interests of the European investment management 
industry. 

The fund label in the Commission Proposal for a Regulation of the European 
Parliament and of the Council on European Social Entrepreneurship Funds, (COM 
(2011) 0418) creating a common framework for Social Entrepreneurship funds in 
the EU. 

European Venture 
Capital Funds 
(EuVECA) 

The fund label in the Commission Proposal for a Regulation of the European 
Parliament and of the Council on European Venture Capital Funds, (COM (2011) 
860) creating a common framework for Venture Capital funds in the EU. 

Green Paper on 
financing long term 
investment in the 
European economy 

A Commission paper that explores demand and supply side issues and 
developmental trends across the financial markets for long term financing, and 
identifies a series of measures to be explored for tackling these issues or areas in 
which further work might be done. 

Greenfield 
infrastructure 

Hedging arrangement 

An investment in an infrastructure project that is to be commenced from scratch. 

Combinations of trades on derivative instruments and/or security positions which do 
not necessarily refer to the same underlying asset and where those trades on 
derivative instruments and/or security positions are concluded with the sole aim of 
offsetting risks linked to positions taken through the other derivative instruments 
and/or security positions. 

High-Net-Worth-
Individuals (HNWI)  

A classification of individuals that earn a high net worth income. This status denotes 
that such investors may be treated as sophisticated investors alongside professional 

EN 

56 

   EN 

 
 
 
 
 
 
and institutional investors. 

Index funds 

An index fund matches the shareholdings of a target index, such as the Standard & 
Poor's 500 Composite Stock Price Index (S&P 500). Index funds are distinct from 
actively managed funds in that they do not involve any stock picking by supposedly 
skilled professionals. Rather, they simply seek to replicate the returns of the specific 
index. 

Institutional investors 

Professional investors that invest large sums of capital, such as banks, insurance 
companies, and pension funds. 

Leverage 

The use of various financial instruments or borrowed capital to increase the potential 
return of an investment. A general term used for any technique to multiply gains and 
losses. Leverage can be generated by borrowed money that a fund employs to 
increase buying or selling power and increase its exposure to an investment or by 
using derivative instruments that embed already leverage. It is expressed as a ratio 
between the exposure of the fund and its Net Asset Value 

Limited Partnership 

The legal structure used by most venture and private equity funds. The partnership is 
usually a fixed-life investment vehicle, and consists of a general partner (the 
management firm, which has unlimited liability) and limited partners (the investors, 
who have limited liability and are not involved with the day-to-day operations).  

Liquidity 

A complex concept that is used to qualify market and instruments traded on these 
markets. It aims at reflecting how easy or difficult it is to buy or sell an asset, 
usually without affecting the price significantly. Liquidity is a function of both 
volume and volatility. Liquidity is positively correlated to volume and negatively 
correlated to volatility. A stock is said to be liquid if an investor can move a high 
volume in or out of the market without materially moving the price of that stock. If 
the stock price moves in response to investment or disinvestments, the stock 
becomes more volatile. 

Locked-in capital 

Capital that is invested subject to the condition that it cannot be withdrawn for a 
definite period of time. 

Lock-up period  

A period of time during which an investor is unable to withdraw the capital invested 
or redeem units or shares held in an investment fund. 

Long-term Assets  

Assets that are not Transferable Securities and are investments that fall within the 
following categories: Infrastructure projects, Property, Aircraft and maritime 
financing, and SMEs and larger unlisted companies. 

Long-term Investments 

Investments in long term assets, or investments made with a long time horizon. 

Markets in Financial 
Instruments Directive 
(MiFID) 

Directive 2004/39/EC that lays down rules for the authorisation and organisation of 
investment firms, the structure of markets and trading venues, and the investor 
protection regarding financial securities. 

Net Asset Value (NAV)  The value of a single unit/share of a fund, based on the value of the underlying 

assets minus the fund’s liabilities over the number of units/shares outstanding. It is 
usually calculated at the end of each business day. The NAV per share is used to 
determine prices available to investors for redemptions and subscriptions. 

Non-listed company 

A company whose shares are not on the official list of shares traded on a particular 
stock market. 

Non-transferable 
Securities 

All securities or instruments that are not Transferable Securities. Non-transferable 
securities include Long-term Assets. 

Open-ended fund 

A collective investment undertaking that can issue and redeem shares at any time. 

EN 

57 

   EN 

 
 
 
 
Patient capital 

Principle of 
proportionality 

Private equity 

Investors can buy or sell shares directly from the fund. 

Capital that is provided by investors for the long-term and with the expectation that 
higher-returns will be achieved from holding such investment for a long period of 
time as a result of the long-term nature of the underlying investment. 

Similarly to the principle of subsidiarity, the principle of proportionality regulates 
the exercise of powers by the European Union. It seeks to set actions taken by the 
institutions of the Union within specified bounds. Under this rule, the involvement 
of the institutions must be limited to what is necessary to achieve the objectives of 
the Treaties. In other words, the content and form of the action must be in keeping 
with the aim pursued. The principle of proportionality is laid down in Article 5 of 
the Treaty on European Union. The criteria for applying it is set out in the Protocol 
(No. 2) on the application of the principles of subsidiarity and proportionality 
annexed to the Treaties. 

Provides equity capital to enterprises not quoted on a stock market. It includes the 
following investment stages: venture capital, growth capital, replacement capital, 
rescue/turnaround and buyouts. Private equity funds are pools of capital managed in 
general as closed-end, fixed-life funds doing primarily equity capital investments 
into enterprises not quoted on stock market. The majority of private equity consists 
of institutional investors and accredited investors who can commit large sums of 
money for long periods of time 

Private placement 

The means of marketing investment funds under national rules in individual 
Member States. 

Project Bond Initiative 
/ Europe 2020 Project 
Bond Initiative 

Project finance 

The Project Bond Initiative is the result of a Cooperation Agreement between the 
European Commission and the European Investment Bank and aims to improve the 
capital market financing of infrastructure in Europe. The Project Bond Initiative is 
designed to stimulate capital market financing for infrastructure delivered under 
‘project finance’ structures, including Public Private Partnerships (PPPs). It will 
seek to enhance the credit rating of bonds issued by project companies to a rating 
level that is attractive for investors, and to lower the project’s overall financing 
costs. 

Project finance is a method of financing long-term infrastructure and industrial 
projects on the basis of the revenues generated by such projects that serve both as 
the source of repayment and security for the completion of the projects. The capital 
structure of project financing combines both equity and debt as financing sources for 
funding the project. 

Prospectus Directive  

Directive 2003/71/EC of the European parliament and of the Council, which lays 
down rules for information to be made publicly available when offering financial 
instruments to the public. 

Public Private 
Partnerships (PPP) 

A joint venture between a public sector authority, such as a local government 
authority, and companies from the private sector for the provision of a public service 
or other business venture, such as the completion and operation of an infrastructure 
project, aimed at the public benefit. 

Quasi-open-ended fund  An investment fund that incorporates features of both an Open-ended and Closed-

ended fund. 

Redemption rights 

The right of redemption is the right held by investors in a fund to require the fund to 
repurchase the shares or units they hold in such fund. 

Regulation  

A form of EU legislation that has direct legal effect on being passed in the Union. 

Retail investors 

Investors that are not High-Net-Worth Individuals and Institutional Investors. 

EN 

58 

   EN 

 
 
 
 
 
 
 
Shares or units 

Shares or units are instruments that represent the ownership interest of investors in 
an investment fund or in such other legal entity that may issue shares or units.  

Single Market Act 
(SMA I and II) 

The Single Market Act presented by the Commission in April 2011 sets out twelve 
levers to boost growth and strengthen confidence in the single market. In October 
2012 the Commission proposed a second set of actions (Single Market Act II) to 
further develop the Single Market and exploit its untapped potential as an engine for 
growth. 

Spread 

The difference between the bid and the ask price of a security or asset. 

Stability and Growth 
Pact (SGP) 

A rule-based framework for the coordination of national fiscal policies in the 
European Union. It was established to safeguard sound public finances, based on the 
principle that economic policies are a matter of shared concern for all Member 
States. 

Syndication  

A process through which a group of banks are providing a loan to a debtor, usually 
with the division of risk and financing across the different banks which are part of 
the process (syndicate). 

Transferable Securities  

Underlying asset 

Transferable Securities as defined in the UCITS  Directive, that is: (i) shares in 
companies and other securities equivalent to shares in companies (shares); (ii) bonds 
and other forms of securitised debt (debt securities); or (iii) any other negotiable 
securities which carry the right to acquire any such transferable securities by 
subscription or exchange. 

A term used in derivatives trading, such as with options. A derivative is a financial 
instrument whose price is based (derived) from a different asset. The underlying 
asset is the financial instrument (e.g., stock, futures, commodity, currency or index) 
on which a derivative's price is based.  
The term underlying may also be used to refer to the underlying investments of an 
investment fund, such as: real estate, infrastructure projects, loans etc. 

Undertakings for 
Collective Investment 
in Transferable 
Securities (UCITS) 
Directive  

Directive 2009/65/EC of the European Parliament and of the Council of 13 July 
2009 on the coordination of laws, regulations and administrative provisions relating 
to undertakings for collective investment in transferable securities (UCITS).  
UCITS is a European legislative framework that creates common rules for the 
authorisation, supervision, structure and activities of UCITS compliant collective 
investment schemes in view of ensuring a strong protection of investors in UCITS. 

Underwriting  

The process of checks that a lender carries out before granting a loan, or issuing an 
insurance policy. It can also refer to the process of taking responsibility for selling 
an allotment of a public offering. 

Venture capital 

A subset of private equity and refers to equity investments made for the launch, 
early development or expansion of a business. 

Volatility  

The change in value of an instrument in a period of time. This includes rises and 
falls in value, and shows how far away from the current price the value could 
change, usually expressed as a percentage. 

2. 

ANNEX: NATIONAL FUND RULES 

The  table  here  below  lists  fund  frameworks  that  exist  in  the  different  Member  States  and 
allow  exposure  to  illiquid  assets.  The  main  characteristics  of  each  fund  are  summarized  to 
give an overview of the different product rules that may exist. 

EN 

59 

   EN 

 
 
 
 
 
 
 
 
 
 
 
Member State, 

Types of eligible assets, AuM 

Fund type 

Investor type  Liquidity 

Fund regimes 

FR, 

FCPR 

(Wide 
distribution) 

least  50% 

At 
companies 

in  non-listed 

Open-ended  

Include retail 
investors  

Depending on 
the contract 

requirements 

Up  to  15%  in  current  account 
advance when funds are holding 
at least 5% of the capital; 

€27 bn 

Redemption requirements/ 
Holding periods 

Other requirements  

Up to 10 years 

Retails FCPR must provide a KIID. 

Holding  shares  or  voting  rights  of  a 
target company does not exceed  35 % 

Holding  of  shares  or  units  of  a  CIS 
does not exceed 10% 

Holding 
company does not exceed 10% 

  securities  of  a  specific 

Holding shares or units of CIS does not 
exceed 35% 

FCPR déclaré 
(registred FCPR) 

least  50% 

At 
companies 

in  non-listed 

Open-ended 

A maximum of 15% invested in 
current  account  advance  when 
funds are holding at least 5% of 
the capital 

Any 

Open-ended 

FCPR 
conctractuel 
(specialised) 

FCPI 

(Innovation 
funds) 

At 
least  60% 
innovative companies.  

in  unlisted 

Open-ended  

Unlisted  companies  localised  in 
EU 

Retail 
Investors 
subject to 
minimum 
subscription 
requirement of 
500 000€ 

Retail 
Investors 
subject to 
minimum 
subscription 
requirement of 
250 000 

Include retail 
investors 
(subject to  

EN 

Depending on 
the contract 

Up to 10 years 

Depending on 
the contract 

Depending on the contract 

Depending on the contract 

Depending on 
the contract 

60 

 Up to 10 years 

The funds must provide a KIID 

Holding of shares or voting rights of a 
target company does not exceed  35 % 

Holding  of  shares  or  units  of  a  CIS 

EN 

 
  
 
 
 
 
Securities  with  a  right  on  the 
capital  of  a  SARL  (limited 
company) 

Listed  company  securities  < 
20% 

A maximum of 15% invested in 
current  account  advance  when 
funds are holding at least 5% of 
the capital, 

  € 4,4bn raised in 1997-2007  

does not exceed 10% 

Holding  of  securities  on  a  specific 
company does not exceed 10% 

Holding of shares or units of CIS does 
not exceed 35% 

invested 

least  60% 

At 
in 
unlisted  companies  localised  in 
one, 
four 
three 
two, 
neighbouring region.  

or 

Unlisted  companies  localised  in 
EU. 

Listed  company  securities  < 
20% 

A maximum of 15% invested in 
current account advance  when 
funds are holding at least 5% of 
the capital,  
€ 196m raised in 2011;  € 
142,3m raised in 2012 

Credit and debt instruments 

Open-ended  

Include retail   Depending on 

Up to 10 years 

The funds must provide a KIID. 

the contract 

The FIP cannot be a feeder funds. 

Holding of shares or voting rights of a 
target company does not exceed  35 % 

Holding  of  shares  or  units  of  a  CIS 
does not exceed 10% 

Holding  of  securities  on  a  specific 
company does not exceed 10% 

Holding of shares or units of CIS does 
not exceed 35% 

Open and 
closed ended 

Qualified 
investors 

Depending on 
the contract 

Depending on the contract 

Depending on the contract 

FIP 

(Regional funds) 

FCT 
(securitisation 
vehicle) 

SICAF 

Financial instruments  

Closed-ended  Retail 

Investors 
subject to 
minimum 
subscription 

Depending on 
the contract 

Depending on the contract 

Depending on the contract 

EN 

61 

EN 

 
  
 
Any,   

€150 bn 

IRL, 

QIF 

(Qualifying 
Investor Fund)  

DE,  

Spezial-
Sondervermögen 
or Spezialfond  

Infrastruktur-
Sondervermögen 

Only 20% of the fund’s value 
may be invested in unlisted 
companies. 

€876 bn 

The investment in PPPs must at 
least amount to 60%, but may 
not exceed 80% of the NAV and 
no more than 10 % of NAV can 
be invested in a single PPP 
project company. 

No more than 20 % of an 
infrastructure fund's assets are 
invested in listed securities. 

No more than 30 % of an 
infrastructure fund's assets are 
invested in real estate and rights 
of this kind. 

Open-ended  
or closed 
ended 

requirement of 
10 000€ 

Include 
Qualifying 
investor  (+ 
subject to 
minimum 
subscription 
requirement) 

No 
requirement 

Redemption varies depending 
on a type of fund from quarterly 
to yearly (open-ended) to lock 
in to maturity (closed-ended).  

A general risk spreading requirement  

Open-ended 

Institutional 
only 

No 
requirement 

Depending on the contract 

Depending on the contract 

Open –ended 
(possibly can 
change to 
allow only 
closed-ended) 

Include retail 
investors 

Depending on 
the contract 

No more than once every six 
months, but at least once a year. 

Depending on the contract 

Investors can only request the 
disbursement of their units in an 
infrastructure fund on a 
particular redemption date if, on 
the date their notice of 
redemption is received, the 
value of the redeemed units 
does not exceed EUR 1 million. 

Any 

Limited 
partnership  

(e.g. GmbH&Co 
KAG) 

Closed- ended  Private 

placement  

Depending on 
the contract 

Typically established for a term 
of 10+1 

Management team capital commitment 
to the fund of at least 1% of the 
aggregated capital commitment is 
customary.  

UK, 

NURS 

EN 

All UCITS  + direct property, 
other funds 

Open-ended 

Include retail 
investors 

Depending on 
the contract 

By close of play on the fourth 
business day following the 
instruction to redeem. 

Limits on permitted investments, 
diversification limits, concentration 
limits, counterparty exposure, limited 

62 

EN 

 
  
QIS 

All UCITS + direct property, 
Loans, other funds and etc.  

Open-ended 

Limited 
partnerships  

Any 

Closed-ended 

Include 
qualified 
investors 

Institutional 
investors or 
private 
placement  

Depending on 
the contract 

Illiquid,  
expected 
commitment 
for  the total 
life time of the 
fund 

Where investments are made in 
real estate at least once every 
six months.   

Depending on the contract 

Typically established for a term 
of 10, a common holding period 
is 3-5 years.  

temporary borrowing 

No restrictions, borrowing is permitted 
up to 100% of the net value of the 
scheme property 

A cap exists for certain pensions funds 
investing in LPs 

Any  

Closed- ended  Professional 

No restrictions  No restrictions 

No restrictions 

NL, 

Any  

Fund for join 
account (FGR) 

Limited 
partnership 
(CV)61 

Limited liability 
company (NV or 
BV)63 

Any 

IT, 
Fondo Chiuso66  

Any, 

€5,8bn 

LUX, 

Any 

Closed-ended 
or (semi) 
open-ended 

Include retail 
investors 

No restrictions  No restrictions 

Restrictions depending on the tax 
structure60  

investors only, 
except for the 
cases of small 
investment 
institutions62 

Include retail 
investors 
provided a 
number of 
requirement 
are met64 

Include retail 
investors 

Open-ended or 
closed- ended 

Closed-ended  

No restrictions 

If approved by shareholders  

Restrictions depending on the tax 
structure65 

No restrictions  The life of the fund cannot 
exceed 30 years + 3 years 
extension 

No restrictions 

Open  –ended 
or 
closed-
ended 

Sophisticated 
investors  only 
(Institutional 

No restrictions  A  SIF  with  variable  share 
capital  is  not  subject  to  any 
restrictions  other  than  those  set 

Risk-spreading rules apply. The rule is 
applied on  a  case-by-case  basis,  but  in 
general,  a  SIF  must  target  several 

EN 

63 

EN 

 
  
 
 
Specialised 
Investment  Fund 
(SIF) 

UCI Part II67 

Any 

investors, 
Professional 
investors, 
Well-informed 
investors). 

out 
in 
incorporation. 

its 

articles 

of 

entities. 

redemptions 

are 
Although 
possible, 
restrictions 
certain 
apply  to  a  SIF  with  fixed  share 
capital  depending  on  the  legal 
form of the SIF.   

Open  –ended 
or 
closed-
ended 

No  restriction 
(May 
be 
offered  also  to 
retail 
investors) 

No restriction  A  UCI  Part  II  with  variable 
share  capital  is  not  subject  to 
any restrictions other than those 
set  out 
its  articles  of 
in 
incorporation. 

Risk-spreading rules apply. The rule is 
applied on  a  case-by-case  basis,  but  in 
general,  a  UCI  Part  II  must  target 
several entities. 

redemptions 

are 
Although 
possible, 
restrictions 
certain 
apply to a UCI Part II with fixed 
share  capital,  depending  on  the 
legal form of the SIF.   

EN 

64 

EN 

 
  
 
 
 
 
Table 
funds68

[-] 

Available 

legal 

vehicles 

for 

non-harmonised 

investment 

“The  analysis  of  PWC  indicates  that  there  are  more  than  50  different  legal  structures  used 
across  the  nine  selected  jurisdictions  to  establish  and  operate  non-harmonised  investment 
funds covering the key investment strategies or policies. Some jurisdictions permit a number 

EN 

65 

   EN 

 
 
of  different  legal  structures  that  could  be  used  to  establish  and  distribute  non-harmonised 
funds. 

Other  jurisdictions  (e.g.  Italy)  offer  a  comparatively  limited  choice  of  legal  structures  to 
choose  from.  The  legal  structures  vary  between  different  types  of  corporate  vehicles, 
structures  without  legal  personality,  tax  transparent  structures  and  common  ownership 
vehicles. To an extent, especially with regards the local taxation frameworks, the multitude of 
different legal structures that must or can be used across the four key investment objectives 
makes jurisdictional comparative analysis more complex than would otherwise be the case. 

The analysis indicates that regulatory impediments or barriers exist in all nine jurisdictions to 
the public distribution of non-harmonised funds, including funds distributed domestically and 
those  distributed  on  a  cross-border  basis.  Findings  from  the  market  survey  support  the 
existence  of  these  barriers  to  retail  distribution.  Many  respondents  commented  on  the 
existence and strength of such regulatory barriers. 

In  summary,  the  following  regulatory  impediments  to  retail  distribution  of  non-harmonised 
funds have been identified within the jurisdictions in scope: 

•  A  lack  of  specific  regulatory  regime  or  structure  for  non-harmonised  funds  in  some 

jurisdictions, (e.g. Poland for all non-harmonised funds and Belgium for HF); 

•  In  some  jurisdictions  a  complete  prohibition  on  the  direct  public  distribution  of  certain 

fund types, (both domestic and foreign funds); 

•  The  imposition  of  minimum  initial  subscription  amount  (often  significantly  higher  than 

that established for this study) blocking distribution to retail investors; 

•  None of the jurisdictions operate reciprocal distribution arrangements for foreign funds, 

•  All  jurisdictions  require  foreign  non-harmonised  funds  to  be  “authorised”  to  publicly 

distribute, adding to the administrative burden, cost and time-to-market; 

•  Local  regulatory  regimes  require  foreign  domiciled  non-harmonised  funds  to  conform  to 

and to satisfy local regulations for the equivalent local product; 

•  Three jurisdictions impose additional requirements on foreign products.” 

3. 

ANNEX: EXAMPLES OF PROBLEMS FOR RETAIL INVESTORS  

Investments in illiquid and long-term assets for retail investors have been permitted in some 
Member States. However, investor protection and fund operating rules have not been able to 
eliminate  problems  for  retail  distribution  of  funds  exposed  to  such  assets.  Situations  have 
arisen where retail investors had invested a substantial proportion of their savings in only one 
fund that suffered heavy losses during the last financial crisis, indicating amongst other issues 
possible  problems  with  the  distribution  of  such  funds.  This  section  gives  some  examples  of 
the problems arising following the recent liquidity and market shocks. 

3.1. 

Germany 

In Germany the investments in long-term assets such as property, energy, ships or companies 
is  possible  for  retail  investors  through  closed-ended  funds.  The  retail  investors  have  always 
represented  the  big  bulk  of  this  asset  class  in  Germany.  According  to  the  data  compiled  by 
VGF (Verbank Geschlossene Fonds), private investors represented 82% in 2011 and 70% in 
2012  of  the  total  money  (€5.85  billion  in  2011  and  €4.50  billion  in  2012)  raised  by  these 

EN 

66 

   EN 

 
 
funds. Some of these funds never achieved the promised return and in some situations these 
funds lost substantial amount of their portfolio. Retail investors were severely hit. 

Return: according to a study of the rating agency Scope realized on property funds between 
2001 and 2006, only 58% of the funds matched the dividend and redemption plan. (Source: 
“Geschlossene Fonds in Not”, Die Welt, 24.01.2013) One of the reasons is that funds are too 
heavily concentrated in one sector which impacts too much the return target when the sector 
faces problem. Another reason is the too long maturity of some funds. For funds with 15 or 20 
years maturity, the risk cannot be hedged for a so long period. It means that the return will be 
impacted by inflation or changes in interest rates.  

Costs:  according  to  a  study  made  by  the  agencies  Scope  and  Feri,  the  costs  (all  inclusive) 
reached abnormal levels: from an average of 17% for foreign property funds to an average of 
21%  for  energy  funds.  Some  funds  reached  cost  levels  above  30%.  The  distributors  are 
gaining  the  most  from  these  costs:  banks,  regional  banks  or  other  product  distributors. 
(Source: “Die schlechteste Geldanlage der Welt”, Handelsblatt, 15.04.2011). For comparison 
purposes, normal levels of costs for closed-ended funds investing in such long-term assets are 
between 10% and 15%. One of the reasons of such high costs is the fact that managers often 
commit to acquire the assets before having the corresponding subscriptions. Because they are 
confronted  to  the  risk  to  have  to  pay  for  assets  without  having  the  money,  they  pay  high 
commissions  to  distributors  for  finding  as  quick  as  possible  the  investors.  The  payment  of 
these high commissions can represent a huge cost for the investor. 

Conflict of interest: investments in long-term assets involve higher risk of conflict of interest 
than  investments  in  listed  shares  and  bonds.  The  transactions  are  mainly  processed  through 
private  placements  which  increase  the  risk  of  collusion  between  the  fund  manager  and  the 
target investment. For example a manager of a property fund may be linked to the company in 
charge of building the property in which the fund is investing: there is a risk that the fund is 
pays a higher than normal price for that property. Another example might be that a manager 
of a private equity fund is linked with the bank that has lent money to a company in which the 
fund is buying equity participation: the investment might be dictated by the fact that the bank 
wanted to be sure to be reimbursed. One example is the investment in Hotel Adlon in Berlin 
through  a  fund  managed  by  Jagdfeld  that  has  also  renovated  the  hotel  (Source:  “Die 
schlechteste Geldanlage der Welt”, Handelsblatt, 15.04.2011) 

Leverage:  closed-ended  funds  make  an  extensive  use  of  leverage  for  increasing  the  size  of 
the  fund.  Fund  managers  enter  into  borrowing  agreements  with  banks  to  obtain  additional 
funding. When the fund faces problems, the banks are the first to get reimbursed, before the 
investors. Often investors are also forced to stand with their own money for the losses of the 
banks. This risk is even higher when the fund borrows money in a foreign currency: several 
funds borrowed money in Swiss francs which causes several problems when the Swiss franc 
appreciated in value. This is often associated with specific clauses for banks that allow them 
to stop dividend payments or redemptions to investors when the value of the fund deviates too 
much from the value of the borrowing. (Source: “Neues Jahr – Alte Probleme: Geschlossene 
Fonds in Nöten”, Anlegerschutz Anwälte, 24.01.2013) 

Own capital (in € bn) 

Total size (in € bn) 

Leverage 

Property funds DE 

Ship funds 

Foreign property funds 

Leasing funds 

Private equity funds 

23.3 

20.7 

13.5 

11.6 

7.1 

46.3 

50.3 

25.8 

27.7 

7.2 

199% 

243% 

191% 

239% 

101% 

EN 

67 

   EN 

 
  
Aircraft funds 

Life insurance funds 

Energy funds 

Speciality funds 

Infrastructure funds 

Portfolio funds 

Source VGF Branchenzahlen 2012 

5.6 

5.3 

3.7 

3.2 

1.8 

0.9 

14.5 

7.8 

8.8 

3.3 

2.3 

0.9 

259% 

147% 

238% 

103% 

128% 

100% 

According  to  the  agency  Feri,  €200  billion  have  been  invested  during  the  last  30  years  in 
closed-ended  funds  and  at  the  same  time  €204  billion  of  credit  have  been  taken  by  these 
funds. 

3.2. 

UK 

During  the  financial  crisis  some  UK  property  funds  offered  to  retail  customers  invoked 
contractual  clauses  allowing  them  to  defer  redemptions,  usually  for  up  to  six  months.  They 
did this for two main reasons. 

First,  the  high  volume  of  surrender  requests  coming  from  retail  customers  meant  that  funds 
needed  to  dispose  of  some  of  their  property  holdings  to  meet  those  requests.  Firms  running 
funds  affected  by  this  were  concerned  that  they  might  be  forced  into  a  'fire  sale'  of  assets: 
selling  property  below  its  real  value  to  meet  these  requests  within  a  short  time  frame.  This 
raised  the  concern  that  selling  property  below  its  true  market  price  would  disadvantage 
investors  who  did  not  want  to  redeem  their  money  but  instead  ride  out  the  market  falls.  A 
significant  number  of  firms  invoked  clauses  in  their  terms  allowing  them  to  defer  non-
contractual redemptions. 

The  second  issue  related  more  narrowly  to  property  funds  used  to  back  unit-linked  life  and 
pension  contracts.  Such  property  funds  are  allowed  to  hold  up  to  20%  of  property  assets 
indirectly, usually via unregulated collective investment schemes. They are also allowed to be 
geared, but only up to 10% of the aggregate value of the fund. In practice a number of funds 
held property highly geared unregulated collective investment schemes, but had no gearing on 
direct property holdings in order to comply with the overall 10% limit. This made disposing 
of such assets in response to high volumes of redemption requests particularly challenging. In 
some  cases  such  unregulated  collective  schemes  held  one  single  very  large  property,  for 
example a shopping centre, and had a very small number of unit-holders. In some cases the 
only  way  to  dispose  of  the  holding  was  to  secure  permission  from  the  other  unit-holders  to 
wind up the fund, but they were often unwilling to do so. 

The firms deferring redemptions were contractually allowed to do so and this information had 
as a rule been included in disclosure documents provided to investors. As a result this might 
not  be  considered  an  instance  of  mis-selling  but  rather  an  example  of  the  challenges  for 
market efficiency in the face of what might not be rational investor behaviour. It points to the 
challenges  any  funds  which  invest  in  illiquid  assets  may  face  under  stressed  market 
conditions.69 

3.3. 

Costs of investing in funds 

Managers  of  closed-ended  funds  face  implementation  costs  that  managers  of  open-ended 
funds  generally  do  not  have  to  incur.  The  investment  in  long-term  assets  is  not  as  easy  as 
investing in listed shares or bonds and therefore requires additional costs. These costs include: 

•  Acquisition  costs  such  as  conception  costs,  legal  costs,  consulting  costs,  due  diligence 

costs or tax advisory costs 

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•  Financing costs: setting up the financing structure 
•  Fund costs: fund administration and related tasks 

In average these one-off costs might range between 10% and 15% of the fund’s money. The 
annual running costs then will amount to around 0.50%70.  

This has to be compared with the costs of open-ended funds. These funds have generally less 
implementation costs but higher running costs. Assuming no implementation costs at all and 
2% annual running costs (usual level observed in the market), the level of fees is very similar 
for an investment of 10 years. 

Open-ended fund: 2% annual cost 

Closed-ended fund: 15% upfront and 0.50% 
annual cost 

Year 

Total no fees 

Total with fees  Total fees  Total no fees  Total with fees  Total fees 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

€1,000 

€1,050 

€1,103 

€1,158 

€1,216 

€1,276 

€1,340 

€1,407 

€1,477 

€1,551 

€1,629 

€1,000 

€1,029 

€1,059 

€1,090 

€1,121 

€1,154 

€1,187 

€1,222 

€1,257 

€1,293 

€1,331 

€21 

€44 

€68 

€94 

€123 

€153 

€186 

€220 

€258 

€298 

€1,000 

€1,050 

€1,103 

€1,158 

€1,216 

€1,276 

€1,340 

€1,407 

€1,477 

€1,551 

€1,629 

€850 

€888 

€928 

€969 

€1,013 

€1,058 

€1,105 

€1,155 

€1,206 

€1,260 

€1,317 

€162 

€175 

€188 

€203 

€218 

€235 

€252 

€271 

€291 

€312 

These calculations assume a 5% annual growth, no inflation and payment of the fees at the end of the year. 

This stable shows that after an investment of 10 years, the cost level is mostly comparable: 
29.8% for the open-ended fund and 31.2% for the closed-ended fund. 

When the fund is marketed through distribution channels, the investor might face in addition 
distribution costs that are not taken into account in this section. 

4. 

ANNEX: ASSET CLASSES 

4.1. 

Infrastructure projects 

4.1.1.  Description and market Size 

Industry  now  views  infrastructure  as  a  separate  asset  class.  Distinction  is  sometimes  made 
between  investing  in  core  infrastructure,  such  as  roads,  airports  and  ports,  utilities, 
telecommunications infrastructure, social infrastructure and tangential assets, where the latter 
means an essential service business inextricably linked to traditional infrastructure assets71.  

Others  make  a  categorisation  within  this  asset  class  according  to  an  overall  risk  profile 
distinguishing  between  core,  value-added  and  opportunistic  investments72.  Core  assets  are 
recognised  to  have  bond-like  features  with  a  correspondingly  more  modest  return  profile. 
Value-added  and  opportunistic  investments  in  infrastructure  are  viewed  as  being  closer  to 
equity participations entailing higher risk and a better return potential. The latter investments 
require more active asset management, operational expertise and ability to cope with a wide 
range of risks73. Depending on a project the fund manager’s experience may be valuable for 
completing an acquisition of infrastructure assets.  

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Infrastructure  investments  are  often  divided  into  two  categories.  So-called  brownfield 
infrastructure  projects  correspond  to  the  completed  infrastructure  projects.  They  are  more 
susceptible  to  direct  acquisitions  given  their  lower  risk  profile  and  due  to  the  fact  that  they 
require less intensive management. So-called greenfield infrastructure projects correspond to 
the  launching  phase  of  an  infrastructure  project.  They  fall  within  the  riskier  group  of 
investments  and  often  require  a  more  active  management  in  order  to  extract  value  from  yet 
undeveloped projects, which can be rewarded with a higher return. Therefore, investments in 
the  latter  are  likely  to  be  handled  with  the  help  of  fund  managers  also  in  the  future  as 
confirmed by some investors 
Direct Investment vs Commitment to Funds74 

This graph taken out the Preqin Infrastructure Review reveals that investors have a clear bias 
toward the investment in funds instead of investing directly in infrastructure assets. The first 
two categories, commitment to one or more than one fund, account for 68% of the investor 
activity in infrastructure.  

In 2011, more than 350 projects reached financial close in Europe worth approximately €110 
billion75. According to the Infrastructure Journal, the transaction volume is between €100 and 
€150  billion  every  year  since  2007.  This  shows  a  relative  stability  in  the  launching  of  new 
infrastructure projects. 

Different sources provide different estimation as to the amount of financing that the EU will 
need  to  fund  its  infrastructure  over  the  upcoming  years.  Some  sources  estimate  that  the  EU 
would  need  €1  trillion  for  the  period  up  to  2020  to  finance  overall  investment  in  transport, 
energy  and  telecom  infrastructures  networks.76  Other  sources’  infrastructure  needs  for 
investment are estimated to be even higher 77(cf. table below).  

According  to  Dealogic,  the  infrastructure  needs  in  Europe  till  2020  are  estimated  between 
€1’500  and  €2’000  billion.  The  project  financing  needs  are  split  among  the  following 
categories: 

Energy 
Infrastructures 
Oil and Gas 
Mines 
Industrial projects 
Petrochemie 
Telecom 

EN 

34%
31%
18%
6%
5%
4%
2%

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Investment needs in R&D, new technologies and innovation are calculated to amount to €24 
trillion over the same period.78   

OECD’s Survey on Pension Funds Investment in Infrastructure 2011 breaks down the figures 
by specific projects. It reads:  

“From now until 2020, €500 billion is estimated to  be needed for the implementation of the 
Trans-  European  Transport  Network  (TEN-T)  programme.  In  the  energy  sector,  public  and 
private entities in the Member States will need to spend around €400 billion on distribution 
networks and smart grids, another €200 billion on  transmission networks and storage as well 
as €500 billion to upgrade and build new gene ration capacity between now and 2020. Last, 
but not least, between €38-58  billion and €181-268 billion capital 
investment is required to 
achieve the Commission's broadband targets.” 79 

A  separate  section  in  the  OECD  Survey  overviews  the  UK’s  situation  by  referring  to  the 
National Infrastructure Plan 2010. GBP 200 billion was identified as infrastructure financing 
needs  over  the  upcoming  5  years.  In  the  Spending  Review  the  Government  was  ready  to 
commit over 40 billion to fund infrastructure projects.  

PFG Report Investing in Infrastructure Funds of September 2007 stated that in 2007 Germany 
needed €90 billion for infrastructure investments.  

4.1.2.  Market players 

Typically a company or more often a consortium of companies designs, finances and builds a 
new infrastructure project. They create a special purpose entity where the project owners and 
equity investors contribute to its capital and loan providers ensure additional financing. More 
complex  projects  may  involve  corporate  finance,  securitization  or  use  of  derivatives. 
Normally only professional investors are able to directly participate in such projects due to a 
significant  size  of  an  investment  ticket  (that  is,  a  minimal  amount  one  has  to  invest  in  a 
company to be accepted as a shareholder). In this way project owners have to interact with a 
fewer  shareholders  thus  minimizing  the  burden  of  dealing  with  too  many  shareholders  and 
avoiding  various  risks,  including  those  associated  with  the  retail  consumers.  As  mentioned 
before, professional investors can make these investments directly or via funds. 

Examples of infrastructure funds 

•  greenfield infrastructure funds : FIDEPPP (200M€) and FIDEPPP 2 (180M€ targeted) 

•  greenfield renewable energy funds : FIDEME (40M€) - EUROFIDEME 2 (95M€) 

•  Meridiam Infrastructure SICAR: €750m of AUM  

•  Meridiam Infrastructure Europe II SICAR: €935m of AUM 

•  Meridiam Infrastructure North America II: USD1100m  

Detailed example of FIDEPPP 

FIDEPPP  (Fonds  d’Investissement  et  de  Développement  des  Partenariats  Public-Privé)  is  a 
French FCPR that invests in greenfield projects. Created in 2005, the fund is invested in 15 
projects. It typically buys a share in the SPV that have been created for managing the projects. 
Examples of the 15 projects in which the fund is invested are: 

•  26%  participation  in  the  company  ALIS:  concession  contract  for  the  A28  motorway  in 

France 

•  23.3% participation in Arema: partnership contract with the City of Marseille concerning 

the Stade Velodrome 

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•  24%  in  Guyane  SAS:  conception,  financing  and  construction  of  three  schools  in  French 

Guyana 

•  8.5%  in  Mars:  concession  contract  for  the  conception,  financing  and  realisation  of  a 

tramway in Reims 

•  33.5%  in  Helios:  partnership  contract  for  the  conception,  building  and  maintenance  of 

prisons in France 

The fund invests in projects with a minimum value of €50 million and commits a least €1.5 
million of its money in each project. One single project cannot account for more than 20% of 
the portfolio of the fund. 

In  the  UK,  some  closed-ended  infrastructure  funds  are  listed  in  order  to  provide  greater 
facilities  for  the  exchange  of  shares  in  the  secondary  market.  These  funds  are  listed  on  the 
FTSE  250  as  a  normal  share.  As  such  they  are  accessible  for  every  investor,  including  the 
retail ones. 

•  John Laing Infrastructure Fund: value of around £500 million invested in 38 projects 

•  HICL  Infrastructure  Company  Limited:  value  of  around  £1.1  billion  invested  in  79 

projects 

•  GCP  Infrastructure  Investments  Ltd:  value  of  around  £270  million  invested  in 

infrastructure debt 

Focus on John Laing Infrastructure Fund 

The fund invests in equity and subordinated debt issued by infrastructure PPP projects that 
are  mostly  in  their  operational  phase  when  the  construction  phase  is  finished.  Each  project 
cannot  account  for  more  than  25%  of  the  fund’s  portfolio.  The  fund  does  not  invest  more 
than  15%  of  its  assets  in  projects  that  are  under  construction.  The  key  determinant  in  their 
investment  policy  is  that  the  projects  in  which  they  invest  must  generate  revenue  that  is 
backed  by  public  sector  or  government.  They  only  invest  in  countries  that  are  regarded  as 
fiscally strong. The breakdown between sectors is as follows: 

Sector 

Roads and transport 

Street Lighting 

Schools 

Regeneration 

Justice and emergency services 

Defence 

Health 

Weight 

23.8% 

1.9% 

7.8% 

11.4% 

4.5% 

12.5% 

38.0% 

The investments consist of acquiring a stake in concessions. These concessions pay regular 
revenues over their entire length. In this precise example, the remaining length ranges from 
below 10 years to more than 30 years. 

4.1.3.  Relevance for LTI 

Participations in the infrastructure projects can be done directly or through an intermediary. 
Unless  the  project  company  goes  public,  retail  investors  do  not  have  access  to  these  assets. 

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Professional investors may do it directly, but as it appears from the surveys, majority prefers 
to invest through the funds as certain projects require particular expertise and skill to drive the 
venture to a successful closure. Fund managers are able to tailor the investment strategies and 
investment  formats  to  the  needs  to  every  investor.  They  are  able  to  pool  the  investments 
together on the transactions to increase origination power and improve investment terms. This 
can include through public private partnership arrangements.  

For  investors,  infrastructure  debt  reduces  reliance  on  duration-driven  returns  and  adds  skill-
based, difficult to access beta. The asset class complements fixed income with its investment 
grade performance, stable cash yields, attractive liquidity premiums and low correlation with 
other assets. In addition, participating in the infrastructure projects through the funds provides 
a  diversification  benefit  where  a  portfolio  includes  different  assets  by  their  type  and 
geography and they are issued by a number of different issuers.  

Investment  funds  may  represent  a  useful  vehicle  for  matching  the  financing  needs  of 
infrastructure projects. They could contribute at reducing the burden placed on governments 
for  financing  large  infrastructure  projects.  In  a  general  decline  in  public  spending,  many 
infrastructure  projects  may  be  threatened  or  postponed  in  the  future  which  will  inevitably 
affect  the  growth  potential  of  the  European  economy.  Based  on  the  example  of  the  UK 
government  that  seeks  private  funding  for  major  infrastructure  projects,  the  creation  of  this 
new asset class could well serve this purpose. 

Risks of relying on investment funds for financing infrastructure projects cannot be ruled out. 
The  cost  of  private  money  might  be  higher  than  the  cost  of  public  money:  the  return  on 
investment  or  yield  demanded  by  private  investment  sources  such  as  funds  could  likely  be 
higher than the comparable cost of funding for governments. It is then to be expected that the 
funding costs of these projects might rise, thus increasing the future costs for the users of the 
infrastructure (car drivers, patients or students). In addition there is a risk that the introduction 
of  financial  activities  in  the  real  economy  space,  namely  infrastructure  financing,  creates 
uncertainty  when  predictability  is  necessary.  It  cannot  be  excluded  that  financial  market 
turbulences will not affect to a certain degree the viability of these projects. 

The  risks  mentioned  here  above  have  not  yet  materialized.  The  economic  concept  of  the 
involvement of investment funds has proven to be valid since numerous investment funds are 
already  active  in  this  sector.  The  possible  instability  of  introducing  capital  markets  in  such 
projects is counterbalanced by the fact that the investment fund must commit the money over 
a long period of time with very limited possibilities to withdraw the money earlier. 

The definition of infrastructure as an asset class will need to be precise enough to avoid any 
misconception. What is important to target is the direct investment in infrastructure projects, 
the  type  of  investment  that  is  entirely  correlated  to  infrastructure  characteristics.  Buying 
stakes  of  infrastructure  companies  does  not  offer  the  same  exposure  because  only  a  small 
proportion  of  their  business  may  be  related  to  infrastructure.  Furthermore  these  companies 
may be totally absent from the financing of new infrastructure projects but entirely focused on 
the maintenance of existing ones (e.g. toll roads). 

4.2. 

Property 

4.2.1.  Description and market size 

The  investment  in  property  assets  is  broad  in  nature  and  may  cover  different  stages  in  a 
property cycle. Usually the investments are categorized among the following sectors: 

Investment 

Characteristics 

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Raw land 

Apartments 

Office buildings 

Warehouses 

Shopping centers 

Hotels 

Source: CFA Institute, 2011 

Illiquid, return from value appreciation only 

Medium liquidity, return from income and appreciation 

Medium liquidity, return from income and appreciation 

Medium liquidity, return mostly from periodic income 

Low liquidity, return from income and appreciation 

Medium / low liquidity, return from income and appreciation 

The property market is a clear and distinct asset class in the asset management universe. The 
fund  industry  offers  different  types  of  strategies  permitting  investors  to  gain  exposure  to 
different classes of real estate assets. Here below are the lists of the 10 biggest funds, from the 
open-end and closed-end nature. 

List of the 10 biggest EU open-end property funds (according to Morningstar) 

Name 

Domicile 

Firm Name 

Fund Size EUR 

Deka-ImmobilienEuropa 

hausInvest 

UniImmo: Deutschland 

UniImmo: Europa 

WestInvest InterSelect 

CS EUROREAL A EUR 

SEB ImmoInvest I 

Grundbesitz Europa 

KanAm grundinvest Fonds 

Deka-ImmobilienGlobal 

DE 

DE 

DE 

DE 

DE 

DE 

DE 

DE 

DE 

DE 

Deka Immobilien Investment GmbH 

12,181,745,560 

Commerz Real Investment GmbH 

Union Investment Real Estate GmbH 

Union Investment Real Estate GmbH 

WestInvest mbH 

9,294,545,470 

8,823,403,332 

8,269,247,184 

5,023,756,068 

Credit Suisse Asset Management KAG mbH 

4,873,311,608 

SEB Investment GmbH 

RREEF Investment GmbH 

KanAm Grund KAG mbH 

Deka Immobilien Investment GmbH 

4,639,878,559 

3,685,000,000 

3,341,928,225 

3,233,408,629 

The open-end real estate fund structure is particularly popular in Germany. Out of the €113 
billion of such funds in the EU, €85 billion is domiciled in Germany. 

List of the 10 biggest EU closed-end property funds (according to Morningstar) 

Name 

Domicile 

Firm Name 

Fund Size EUR 

AFI Development 'B' Ord 

Cyprus 

Australian Foundation Investment Co Ltd 

719,115,166 

AFI Development 'A' DR 

Cyprus 

Australian Foundation Investment Co Ltd 

680,090,284 

XXI Century Investments Ord 

Cyprus 

XXI Century Investments 

245,646,307 

Mirland Development Corp Ord 

Cyprus 

MirLand Development Corporation PLC 

241,761,753 

Interfundo Renda Predial 

Portugal 

Interfundos - Gestão de FII 

Interfundo Imosotto - Acumu. 

Portugal 

Interfundos - Gestão de FII 

Interfundo Imorenda 

Portugal 

Interfundos - Gestão de FII 

Conygar Investment Ord 

UK 

Conygar Investment Company Plc 

Santander LusImovest 

Portugal 

Santander Asset Management 

200,179,578 

189,447,388 

187,952,129 

171,370,697 

147,510,213 

Banif Renda Habitação - FIIAH 

Portugal 

Banif Gestão de Activos - SGFIM S.A. 

146,975,106 

The  total  of  closed-end  funds  is  €6.1  billion  in  the  EU.  This  table  should  be  taken  with 
caution since the German closed-ended funds are not included. 

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The sum of open-end and closed-end funds in the EU is, according to Morningstar about €120 
billion. The data collected by industry associations give another picture. For instance EPRA 
has estimated a €300 billion market capitalization for European listed property “that under a 
‘best-case’  scenario  …  has  the  potential  to  double”.80  EFAMA,  in  its  statistical  release  of 
March 2013, estimates at €258 billion the size of the EU property funds market. It is however 
not  clear  if  these  data  cover  the  EU  only  or  the  whole  continent:  numerous  funds  are 
domiciled in European third jurisdictions such as the Channel Islands. 

Example of a fund 

The biggest EU fund, Deka-Immobilien Europa, is invested as such: 

•  72.3%  in  direct  investments  (€7.9  billion  for  125  projects):  for  example  in  Le  Centorial, 

Paris; Moor House, London; Leo, Francfort or Schloss Arkaden, Braunschweig 

•  27.7% in indirect investments, through real estate companies (33 companies) 

•  Mostly invested in office buildings (60.1%) 

•  19.9% of the investments are less than 5 years old and 44.5% are between 5 and 10 years 

4.2.2.  Relevance for LTI 

The property market is characterized by its lack of liquidity, by the large amounts required to 
invest, the non-transferability of the assets (assets are immobile) and low transparency about 
the  factors  that  affect  the  risk  and  return  profile  of  the  investments.  The  market  essentially 
operates with bilateral transactions, without any centralized exchange. This creates difficulties 
to appraise the value of the assets on a regular and accurate basis. Furthermore the market is 
driven by factors that are often opaque for the non-initiated investors: the supply / demand for 
property  assets  is  linked  to  the  location  characteristics,  to  population  factors  or  to  design 
aspects. 

For these reasons, indirect investment is often the unique opportunity for an investor to gain 
access  to  this  market.  Fund  investment,  through  their  pooling  of  capital,  can  provide  the 
necessary  money  for  investing  and  can  face  the  illiquidity  problem  through  diversification. 
Nevertheless  the property illiquidity nature requires long term commitments from investors. 
The  risk  of  the  property  assets  depends  from  the  cycle  of  the  asset:  an  investment  in  the 
construction phase will be more risky than an investment in the period when rental income is 
generated. 

Property assets already benefit from a high penetration in investor’s portfolios; they represent 
a  large  part  of  the  AIFs  in  Europe.  But  their  share  and  market  presence  have  a  potential  to 
increase which would be beneficial for the economy. The property sector is core to the real 
economy  where  it  provides  a  fundamental  source  of  employment  and  economic  growth 
According  to  AREF,  the  commercial  real  estate  sector  contributed  €285  billion  to  the 
European  economy  in  2011  and  directly  employs  over  4  million  people.  A  substantial  part 
(around  50%)  of  the  real  estate  assets  are  held  as  an  investment  and  leased  to  businesses 
reluctant  to  commit  the  capital  and  management  resources  required  of  owner  occupation. 
Therefore investment funds represent a useful link to provide real estate infrastructure needed 
for  entrepreneurship.  Another  area  that  is  less  developed  than  the  commercial  real  estate 
market  is  the  sector  of  social  housing.  The  building  of  real  estate  for  a  social  occupation 
requires massive amount of money that investment funds could help to contribute. 

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4.3. 

Aircraft and maritime financing 

4.3.1.  Description and market size 

The importance of the money required to buy aircraft (often hundreds of  millions of Euros) 
leads companies to search for alternative sources of funding. Banks have originally been the 
key providers of loans to airline companies for the financing of new aircrafts. But, as in other 
long-term sectors, the banks are retreating from this business. According to Addy Pieniazek, 
global head of consultancy at Ascend, an aerospace specialist, the “volume of aircraft loans 
being made by banks had fallen 20% last year [2011]”81.  

In  the  same  article,  William  Glaister,  a  partner  at  Clifford  Chance,  makes  the  following 
statement:  “Aircraft  financing  is  attractive  for  asset  management  firms.  Whether  loans  or 
leases,  they  are  long-term  investments  and  fixed-rate  dollar  assets,  which  is  attractive  for 
dollar  investors.  They  are  also  secured  –  which  is  what  people  want  in  the  current 
environment.” 

From the investor side, Michael Weiss, head of Investec’s aircraft finance business, makes the 
following  statement:  “Pension  funds  like  this  stuff,  as  they  view  it  as  a  long-term,  fairly 
defensive asset. If you want 5% of your fund in alternatives, it makes sense for a slice of that 
to be in aircraft financing.” 

The investment funds will certainly not be able to replace banks for providing loans but they 
will have an increased role in the financing mix of new aircrafts. The needs of the industry for 
financing sources are increasing: according to a study realized by PwC, the value of aircraft 
that have been ordered but not yet delivered amounts to around $700 billion worldwide82. 

The maritime sector is confronted to the same problems: large amount of money are required 
to  develop  new  ships.  As  such  investment  funds  can  play  a  role  in  providing  the  necessary 
resources.  

An example of such fund is the Danish Maritime Fund: 

“Through ownership of Danish Ship Finance, the fund operates to ensure that ship financing 
operations will continue to be undertaken under the auspices of  Danish Ship Finance to the 
benefit of Danish ship owners and/or shipyards. 

The  objective  of  the  fund  is  to  provide  financial  support  for  initiatives  and  measures  to 
develop  and  promote  Danish  shipping  and/or  the  Danish  shipbuilding  industry.  This  is 
achieved  through  financial  support  for  research,  technological  advances  and  product 
innovation, training, recruitment and other initiatives with a maritime focus.” 

4.3.2.  Description and market size 

The  financing  of  such  activities  is  not  as  developed  as  other  long-term  investments. 
Nevertheless they are associated with strong productive and long-term aspects and their share 
in fund’s portfolios is expected to rise over the next years.  

4.4. 

SMEs and larger companies 

There are two possible instruments for gaining exposure to companies: equity participation or 
loan.  This  section  discusses  both  approaches  separately  since  they  represent  two  different 
business models. 

4.4.1.  Description and market size of the private equity 

Private  companies’  capital  is  raised  through  offering  securities  via  a  private  placement  as 
opposed  to  public  offering.  Companies  in  need  of  capital  may  approach  potential  investors 
directly, through private equity funds or fund-of-funds (indirectly). Fund-of-funds can enable 

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larger  or  institutional  investors  to  access  small  venture  capital  funds,  which  in  particular 
provide  alternative  finance  for  innovative  firms  that  have  limited  access  to  more  traditional 
bank  finance.  Depending  on  the  development  stage  of  the  target  company,  the  investment 
funds  are  called  venture  capital  funds  or  private  equity  funds.  They  pool  the  funds  from  a 
number of sophisticated investors and make allocations to highly illiquid and thus long term 
investments.  These  are  highly  illiquid  investments  (a  secondary  market  for  these  assets  is 
small) and require a long-term capital commitment. Typically equity funds are established for 
a  period  of  10  years  and  are  closed-ended,  offering  no  redemption  rights,  with  a  possible 
extension.  Withdrawing  investments  from  these  funds  can  be  difficult.  The  limited 
partnership model provides a framework that has allowed funds to develop that reduce market 
volatility  and  provides  diversification  benefits  for  investors  –  sophisticated  and  long-term 
investors. The disinvestment or liquidation of the investment occurs by a merger with another 
company,  an  acquisition  by  another  company  (including  another  fund)  or  an  Initial  Public 
Offering (IPO), the process for becoming public. 

After  a  sharp  dip  provoked  by  the  financial  crisis  private  equity  market  is  recovering  and 
demonstrates a noticeable pick-up in equity value of investments and a number of companies 
invested in. According to the EVCA Yearbook 2012, €45.5 billion were invested in the sector. 
The sector is recovering from the last financial crisis but it is still far from the level reached in 
2007 with €72.2 billion.  

In  terms  of  portfolio  companies’  location  and  in  terms  of  fund  location,  the  private  equity 
market is mostly developed in France, Benelux, UK and Ireland. These regions represent 55% 
of the EU market in terms of location of the portfolio company and 70% in terms of location 
of the private equity firm. 

A breakdown by industry shows a great variety of sectors where the EU private equity market 
is active. All these investments, as mentioned, are made with a longer term horizon.  

Source: EVCA Yearbook 2012 

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4.4.2.  Market participants in the private equity sector 

Institutional investors such as pension funds, fund of funds, insurance companies or banks as 
well as private individuals are normally on the investor side of a private equity market. There 
is a tendency of seeing banks limiting their exposure to the private equity sector as a result of 
incoming EU rules implementing Basel III83.  

Sources of funds (2007-2011) 

Pension funds 

Fund of funds 

Banks  

Insurance companies 

Private individuals 

Government agencies 

Other asset managers 

Family offices 

Sovereign wealth funds 

Endowments and foundations 

Corporate investors 

Capital markets 

Academic institutions 

Source: EVCA 

Proportion 
25.60% 

15.50% 

13.80% 

8.10% 

6.30% 

5.60% 

5.50% 

5.40% 

5.20% 

3.40% 

3.10% 

2.10% 

0.30% 

The  investors  do  not  target  equally  all  types  of  private  equity  funds.  For  instance  private 
investors  have  a  tendency  to  focus  on  funds  targeting  early  stage  companies,  from  the  seed 
stage to the development stage. This is illustrated by the larger proportion in venture capital 
funds. To the contrary institutional investors have a tendency to invest in mature companies 
(buyout  funds)  whose  strategy  is  to  acquire  other  businesses.  Their  proportion  in  the  total 
amount of capital raised for all types of funds is the highest due to the over representation of 
buyout funds. 

 For the year 2011 

Venture Funds 

Buyout funds 

Generalist funds 

Pension funds 

Fund of funds 

Banks  

Insurance companies 

Private individuals 

Government agencies 

Other asset managers 

Family offices 

Sovereign wealth funds 

Endowments and foundations 

Corporate investors 

Capital markets 

Academic institutions 

Total amount raised 

Source: EVCA 

8% 

9% 

10% 

3% 

15% 

34% 

1% 

2% 

0% 

1% 

12% 

5% 

0% 

22% 

17% 

18% 

7% 

5% 

5% 

4% 

4% 

13% 

3% 

2% 

0% 

0% 

3% 

4% 

11% 

1% 

26% 

13% 

0% 

34% 

0% 

5% 

1% 

3% 

1% 

€4.8 billion 

€33.2 billion 

1.7 billion 

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Private investors are not evenly spread across the EU. Private investors in western countries 
have a clear tendency to invest more in private equity funds than private investors in Central 
and Eastern European countries. Private investors and family offices in France and Benelux 
represent the highest category, all types of funds and investors included. 

 For the year 2011 

UK & Ireland 

Germany, Austria, Switzerland 

Denmark, Finland, Norway, Sweden 

France & Benelux 

Greece, Italy, Portugal, Spain 

Central Eastern Europe 

Source: EVCA 

4.4.3.  Debt participation 

Proportion of private individuals and family offices 

8.60% 

13.70% 

9.50% 

22.20% 

13.10% 

1.20% 

Purchasing  equity  shares  is  not  the  only  possibility  to  participate  in  companies  via  unlisted 
means.  Alongside  their  borrowing  from  banks  and  their  issuance  of  bonds,  companies  have 
recourse  to  private  loans.  Loans  can  be  used  to  finance  different  purposes,  such  as  the 
acquisition of a new business or the development of the company. They are mostly used by 
companies that are too small or because they are not rated by a credit rating agency for having 
a direct access to the bond’s market. Loans represent a useful complement to bank financing 
in the sense that it diversifies the sources of funding for the companies. Typically the money 
is raised in private placements; a company is in need of money and seeks investors ready to 
lend this money. The companies are usually non-investment grade, meaning that they have a 
credit rating below BBB. According to the Loan Market Association (LMA), the size of these 
types  of  loans  in  Western  Europe  amounted  to  €415  billion  as  of  30  June  2012,  to  be 
compared  with  the  €187  billion  of  their  counterpart  in  the  high  yield  bond  market.  The 
investment funds are far from being the only holders of such debt; many other institutions are 
present in this market. 

The loans provide different characteristics than equity participations: loans have a pre-defined 
and  fixed  maturity  and  they  offer  regular  and  pre-defined  yields.  The  risk  attached  to  this 
investment is linked to the credit quality of the company issuing the loan because the fund is 
directly exposed to the counterparty risk, the risk of default of the company. 

Examples of companies that have recourse to loans include the following: 

Company 

TDC 

Legrand 

Numericable 

Picard 

Orangina 

KBW 

Kion 

Prosieben 

Source: LMA 

Country 

Denmark 

France 

France 

France 

France 

Germany 

Germany 

Germany 

Company 

Ruhrgas 

Telenet 

Avio 

Wind 

Sanidad 

Dorna 

Smurfit 

Weetabix 

Country 

Germany 

Holland 

Italy 

Italy 

Spain 

Spain 

UK/Ireland 

UK/Ireland 

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4.4.4.  Relevance for the LTI 

There  is  a  widely  accepted  belief  that  these  investments  often  need  experienced  and  active 
managers who are able to identify and be ready to deal with the variety of risks and issues84.  

Generally investing in private equity funds are limited to institutional investors and are closed 
for a retail population. The latter could get such exposure by participating in the listed funds.  

Venture  capital  and  private  equity  share  the  same  characteristics  in  the  sense  that  both  are 
highly  illiquid  investments  that  require  long  commitments  from  the  investors.  Investment 
funds  play  a  key  role  in  this  asset  class  as  they  represent  the  main  providers  of  financing. 
Venture capital funds and private equity funds represent a clearly distinct fund category in the 
space of alternative funds. These funds are mostly set up as closed-ended funds, which permit 
the investors to sell their units on the secondary market. But as for every closed-end fund, the 
liquidity  in  the  secondary  market  is  not  guaranteed,  thus  possibly  requiring  the  investor  to 
hold its investment till the end of the commitment (usually several years). 

Venture capital funds will benefit from an increased visibility with the creation of a European 
label for venture capital funds. These funds will have to respect harmonized product rules in 
order to earn the label. Units or shares of these recognized funds could be introduced as well 
in the eligible assets to increase the potential that the venture capital can attract. 

The  loan  funds  are  less  developed  than  the  private  equity  or  venture  capital  funds,  even  if 
there is a general trend to have more of such funds. They generally benefit from a more liquid 
secondary market than equity participations but their liquidity is far from being sufficient for 
funds  offering  regular  redemptions.  Because  the  secondary  market  does  not  offer  constant 
liquidity, loans require long-term commitments. 

5. 

ANNEX:  MARKET  OVERVIEW  OF  EXISTING  NATIONAL  FUND  REGIMES  FOR 
ILLIQUID ASSETS 

According  to  EFAMA,  by  the  end  of  the  second  quarter  of  2012,  there  were  18’411  non-
UCITS  funds  in  Europe,  managing  EUR  2’486  billion  of  assets.  The  Luxembourg,  Ireland, 
UK, Germany, France, Italy and the Netherlands are major players in the European market for 
investment funds, and have substantial domestic markets for non-UCITS funds available for 
investors.  

5.1. 

Luxembourg 

Luxembourg does not have a specific regime for real estate or infrastructure funds but offers 
the  possibility  to  set  up  both  regulated  and  unregulated  vehicles  that  lend  themselves  to 
investments  in  real  estate.  The  regulated  vehicles  are  supervised  by  the  Commission  de 
Surveillance du Secteur Financier (CSSF) and include the SIF , the SICAR  and the UCI Part 
II  regimes. The SOPARFI is the non-supervised regime. A number of corporate forms may 
be  used  to  structure  real-estate  funds  in  Luxembourg  under  both  the  supervised  and  non-
supervised regimes.  

Since  its  introduction,  the  Law  of  13  February  2007  (the  ‘SIF  Law’)  on  Specialised 
Investment  Funds  (SIF)  has  become  the  predominant  regime  for  establishing  alternative 
investment  funds  in  Luxembourg.  The  SIF  is  also  the  most  widely  used  regime  for 
Luxembourg  real-estate  investment  funds.  Although  an  institutional  investor  fund  regime 
existed  since  1991,  in  2007  it  was  replaced  by  the  SIF  Law  of  13  February  2007.  SIF  real 
estate  funds  have  grown  exponentially  since  the  introduction  of  the  SIF  law  in  2007.  A 
growth of 350% in SIF real-estate funds has been recorded in July 2012 when compared to 
the  number  of  real-estate  funds  under  the  SIF  predecessor  in  2006.    The  SIF  Law  is  not 

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specifically designed for real-estate or infrastructure funds and real-estate amounts to 8.2% of 
the total assets under management by SIFs as at 31 December 2010. 

As  at  31  December  2011,  Luxembourg  recorded  1,374  SIF  vehicles,  comprising 
approximately 2,800 funds (single funds and sub-funds of umbrella SIFs), with net assets of 
nearly  €240  billion.  The  assets  under  management  have  also  increased  in  significant 
proportions  together  with  the  number  of  SIF  vehicles.    According  to  EFAMA,  as  at 
September 2012 the net assets of non-UCITS funds in Luxembourg amounted to €373 billion.  
This means that approximately 64% of non-UCITS funds in Luxembourg are SIFs. 

In legal terms, SIFs are undertakings for collective investment whose objectives are limited to 
fulfilling three purposes: 

1) the collective investment of its funds in assets in order to spread the investment risks and to 
ensure for the investors the benefit of the results of the management of their assets; 

2)  the  securities  of  the  SIF  are  reserved  to  investments  by  one  or  several  well-informed 
investors; and 

3) the constitutive documents or offering documents of the SIF provide that they are subject 
to the SIF law. 

Although natural persons can invest in a SIF, a SIF cannot be sold to the mass retail public 
but  only to  “sophisticated  natural  persons”. Only “well-informed  investors” may invest in a 
SIF. The concept of “well-informed investor” is defined in the SIF Law by reference to three 
groups  of  investors:  (1)  institutional;  (2)  professional;  and  (3)  a  third  category  of  investors 
that meet a set of defined criteria. The criteria for the third category of eligible investors are 
that the investor:  

a) confirms in writing that he adheres to the status of well-informed investor, and  

b)  either:  (i)  invests  a  minimum  of  €  125,000;  or  (ii)  has  been  subjected  to  an  assessment 
made by a credit institution, an investment firm, or by a management company certifying the 
investor’s  expertise,  experience  and    knowledge  in  adequately  apprising  an  investment  in  a 
SIF. 

The objective of spreading investment risk by a SIF is interpreted by the CSSF in a flexible 
manner due to the sophisticated nature of the eligible investors in a SIF. In principle, a SIF 
would be required to invest not more than 30% of its assets or commitments in securities of 
the same type issued  by  the  same issuer. The CSSF  may  grant  an  exemption from the 30% 
threshold upon appropriate justification or apply additional restrictions. 

The SIF Law requires that the offering document of a SIF include sufficient information for 
investors to be in a position to make a well-informed judgment on the investment proposition. 
In  this  regard,  the  CSSF  would  require  “quantifiable  restrictions”  that  give  evidence  to  the 
fulfilment of the principle of risk spreading.  

Given that there are no investment restrictions imposed on a SIF by the SIF Law, a SIF lends 
itself  to  investing  in  various  asset  classes  and  to  undertaking  various  types  of  investment 
strategies. The success of the SIF is attributed to the great deal of flexibility permitted by the 
SIF Law. A SIF may also take various corporate legal forms such as a company, partnership 
or contractual form.  

Another  attractive  feature  of  the  SIF  is  that  it  may  be  established  with  multiple  investment 
compartments, with each compartment having distinct assets and liabilities. In this way, the 
rights of investors and of creditors concerning a compartment are limited to the assets of that 
compartment, unless provided otherwise.  

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The  SIF  Law  does  not  impose  any  restrictions on  redemptions  by  investors  in  the  fund  and 
redemption rights are subject to the rules contained in the constitutional documents of the SIF.  

A  SIF  must  ensure  there  are  appropriate  risk  management  systems  and  that  conflicts  of 
interest are minimised. The SIF also benefits from lighter publication requirements. 

The UCI Part II regime is another important framework for structuring non-UCITS strategies 
in  Luxembourg.  However,  unlike  the  SIF,  UCI  Part  II  funds  are  open  to  both  retail  and 
institutional  investors.  The  primary  features  of  the  UCI  Part  II  framework  is  that  it  enables 
fund  managers  to  sell  alternative  strategies  to  retail  investors.  UCI  Part  II  funds  are  not 
subject to any investment restrictions in relation to the asset classes in which they may invest. 
This flexibility permits them to combine various investment strategies, including real estate. 
Like SIFs, UCI Part II funds are also required to comply with the principle of risk spreading 
and must therefore spread their investments across several entities. 

5.2. 

United Kingdom 

The UK currently maintains a  domestic-authorised investment fund  regime for sale to retail 
investors,  the  so  called  Non-UCITS  Investment  Schemes  (NURS)  which  operates alongside 
the  UCITS  regime.  NURS  are  UK  funds  that  do  not  comply  with  all  the  UCITS  rules  and, 
therefore,  cannot  be  promoted  across  the  EU.  They  can,  however,  be  sold  to  UK  retail 
investors. NURS can invest in a wider range of eligible investments than UCITS. NURS can 
invest in the same range of assets as UCITS, but they can also invest in real estate, gold and 
units  of  unregulated  funds.  Up  to  20%  of  the  fund's  value  can  be  invested  in  unapproved 
securities. Property funds can borrow up to 20% on a long-term basis. 

In  the  UK,  there  are  both  nationally-regulated  open-ended  funds  and  listed,  closed-ended 
investment  companies  (such  as  real  estate  investment  trusts  or  venture  capital  trusts)  that 
allow retail investors access to asset classes such as real estate, commodities, precious metals 
and private equity, and access to funds of funds where the underlying funds are not UCITS. 
These types of vehicles are invested in generally, but not exclusively, by “mass affluent” and 
“high net worth” retail investors.  

UK authorised funds under management at the end of December 2011 totalled to £595 billion, 
of which property funds represented 2.2%. 

Regarding  private  equity  funds,  the  British  Private  Equity  &  Venture  Capital  Association 
(BCVA) provides figures in their annual report85. At the end of 2011 the members of BVCA 
had a total amount invested of £18 billion covering investments in 1,048 companies. 

The split among the sources of raised money is as follows: 

Investor's type 

Fund of funds 

Pension funds 

Private investors 

Credit institutions 

Insurance 

Government agencies 

Source: BVCA 

2011 

25% 

24% 

7% 

4% 

8% 

9% 

2010 

11% 

25% 

5% 

2% 

2% 

6% 

The  institutional  investors  dominate  the  sector.  Private  investors  represent  nevertheless  the 
fourth category of investors. In terms of money raised, the figures are as follows: 

2009 

2010 

2011 

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Investments (in £ Mio) 

2,987 

6,594 

4,543 

Source: BVCA 

5.3. 

Ireland 

Qualified Investor Fund (QIF) is a non-UCITS fund vehicle, which may be used for gaining 
exposure  to  illiquid  assets.  Whilst  QIFs  are  subject  to  rules  on  supervision,  disclosure  and 
safe-keeping  of  assets,  investment  and  borrowing  are  not  regulated  by  law.  Fund  managers 
must  only  ensure  that  diversification  requirement  and  leverage  limits,  as  stated  in  the 
prospectus,  are  respected.  Investing  in  QIFs  is  restricted  to  qualifying  investors  with  a 
minimum  subscription  requirement  of  €100,00086.  QIF  can  be  formed  as  a  company,  unit 
trust, investment limited partnership, or common contractual fund. 

The  QIF  regime  does  not  specifically  target  real-estate  or  infrastructure  but  because  of  its 
flexibility  it  is  used  for  investing  in  this  asset  class.  QIFs  can  invest  directly  in  underlying 
assets or through special purpose vehicles. Investing through the separate entities allows ring-
fencing liability concerns relating to each project with ensuing benefits and risks.87  

According  to  figures  from  the  Central  Bank  of  Ireland  there  are  1664  QIFs  registered  in 
Ireland.88  In  2010  the  total  assets  managed  by  Irish-domiciled  QIFs  increased  by  35%  to 
€152.8bn89, in 2011 - to €182bn and in December 2012 it was at € 204bn90. More than 100% 
increase in the QIFs assets is calculated between the period of 2009 and the end of 2012.  

Source: Ifia 

With  particular  regard  to  real  estate  and  infrastructure,  at  the  end  of  2009  all  Ireland-based 
funds  had  invested  €15,3bn  in  non-financial  assets.  The  ‘Other  funds’,  which  are 
distinguished  from  equity  and  bond  funds  and  comprise  mixed,  real  estate  and  other  funds, 
had €5,1bn invested in non-financial assets91.  

5.4. 

Germany 

In  Germany,  long-term  investment  opportunities  can  currently  be  offered  by  open-ended 
funds or by closed-ended funds. Different sources exist for having access to the relevant data. 
The data are mostly compiled by associations representing managers in their respective sector. 
Therefore the data might diverge according to the population that is covered by the analysis. 

Open-ended funds are generally only investing in properties. The so-called Open Ended Real 
Estate  Funds  (OEREFs)  are  set  up  as  retail  vehicles  eligible  for  public  marketing.  OEREFs 
offer  retail  investors  the  possibility  to  participate  in  long-term  property  projects,  even  by 

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investing in small amounts, through fund units. German OEREFs have recently undergone a 
major  regulatory  reform  as  a  result  of  liquidity  problems  experienced  by  some  of  these 
products. Under the new rules, units in OEREFs can be redeemed only after an initial lock-up 
period  of  two  years  and  following  a  notice  period  of  twelve  months.  Redemptions  not 
exceeding €30’000 in a calendar year are exempted from these provisions. German OEREFs 
are  very  popular  among  German  investors  and  comprise  roughly  €83  billion  assets  under 
management. The net sales of OEREFs amounted to approximately €2 billion by the end of 
the second quarter 2012. 

Closed-ended  funds  present  another  option  of  investing  in  long-term  assets  available  to 
German retail investors. These funds invest in a vast array of long-term assets, ranging from 
properties,  ships,  private  equity  to  infrastructure  and  energy.  According  to  the  association 
VGF,  they  manage  around  €200  billion  of  assets.  VGF  closed-ended  funds  have  the 
characteristics to be dominated by retail investors since they represent 70% of the €4.5 billion 
raised by the VGF members in 2012. 

The fund size of the VGF closed-ended funds is split as follows: 

Total size (in € bn) 

Property funds DE 

Ship funds 

Foreign property funds 

Leasing funds 

Private equity funds 

Aircraft funds 

Life insurance funds 

Energy funds 

Speciality funds 

Infrastructure funds 

Portfolio funds 
Source: VGF 

46.3 

50.3 

25.8 

27.7 

7.2 

14.5 

7.8 

8.8 

3.3 

2.3 

0.9 

Germany  has  also  a  well-developed  private  equity  fund  market.  According  to  statistics92 
realized  by  the  Bundesverband  Deutscher  Kapitalbeteiligungsgesellschaften  (BVK),  the 
volume of German managed private equity funds amount to €35.88 billion. The fundraising 
activity varies significantly according to the years: 

2007 

Investments (in € Mio) 

5,662 

Source: BVK 

2008 

2,692 

2009 

2010 

2011 

1,071 

1,198 

3,303 

2012 

1,820 

The money is invested mainly in Germany: from a total of 1,227 companies benefiting from 
investments, 1,172 are domiciled in Germany. 

The source of the money comes mainly from institutional investors: 

Investor's type 

Fund of funds 

Pension funds 

Private investors 

EN 

2011 

20.9% 

7% 

6.5% 

84 

2012 

14.9% 

14.8% 

1.9% 

   EN 

 
  
 
Credit institutions 

Insurance 

Source: BVK 

17.2% 

6.3% 

5.6% 

7.3% 

In  2011  private  investors  represented  a  non-negligible  proportion  of  the  money  collected 
whereas in 2012 their proportion shrunk considerably. 

5.5. 

The Netherlands 

In the Netherlands there are adequate supervision funds (established in a jurisdiction that has 
been  designated  by  the  Dutch  Ministry  of  Finance  as  having  adequate  supervision),  non-
UCITS retail funds and exempt funds (marketed only to qualified investors or satisfying other 
conditions set in the Dutch law) regimes operating alongside the UCITS regime. Both open-
ended and closed-ended real estate funds are available for retail investors in the Netherlands.  

Total assets under management of real estate funds in the Netherlands amounted to EUR 77.7 
billion  in  2011,  while  the  assets  under  management  in  other  types  of  funds,  including 
commodity  funds,  infrastructure  funds,  funds  investing  in  derivatives,  private  loans,  ‘green’ 
ventures, was EUR 31.2 billion. Fig. 6 shows the assets under management of the Dutch real 
estate  fund  market  compared  to  the  assets  under  management  in  other  types  funds  for  the 
period of 2008 to 2011. 

Assets  under  management  of  Dutch  real  estate  and  other  fund  types  for  2008-2011  (in 
millions of EUR): 

(Source: Statistics of De Nederlandsche Bank) 

5.6. 

Italy - Real estate funds  

The real estate investment funds allow one making real estate investments without buying the 
property  directly.  These  funds  are  set  up  and  managed  by  management  companies  (SGR) 
authorized  by  the  Bank  of  Italy,  after  consulting  the  national  regulator  Consob.  Their 
characteristics  and  operation  regime,  such  as  commissions  or  the  minimum  investment 
thresholds, are set out in the Management Regulations, which was also approved by the Bank 
of Italy. 

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The  portfolio  of  funds,  separate  from  that  of  the  SGR,  is  funded  through  the  placement  of 
shares with investors. The latter receive income through the distribution of dividends or as a 
result of redemption of units at the end of lifetime of the fund, which can be up to 30 years. 

In June 2009, net asset value (NAV) of the Italian real estate funds amounted to 24.6 billion 
euro, accounting for 10.4 % of the total assets of mutual investment funds (securities and real 
estate) under Italian law. By size of net assets under management, Italy is the fourth largest 
market in Europe, after Germany, the Netherlands and Great Britain. In the past years growth 
of  the  NAV  of  the  funds  Italians  was  very  rapid  (about  €  20  billion  in  December  2003  to 
June), reflecting mainly the entry of new funds. 

5.7. 

France 

France  is  one  the  largest  domicile  for  private  equity  funds  in  Europe.  There  is  a  developed 
activity  from  the  investor  side  but  as  well  from  the  investee  side.  The  precise  size  of  the 
market can be approximated by the amount provided in a study93 realized for the account of 
the  Association  Française  des  Investisseurs  pour  la  Croissance  (APIC):  147  asset  managers 
responded which corresponds to 887 investment funds for a volume of €54.2 billion at the end 
of 2011. 

Here below is a table representing the annual inflows in the private equity sector in France as 
well  as  the  number  of  companies  benefiting  from  investments.  As  shown,  the  amounts 
invested every year vary significantly.  

Investments (in € Mio) 

12,554 

10,009 

4,100 

6,598 

9,738 

2007 

2008 

2009 

2010 

2011 

1st Semester 2012 
2,279 

Invested companies 

1,558 

1,595 

1,469 

1,685 

1,694 

834 

Source: www.afic-data.com / Grant Thornton 

The companies receiving financing from private equity funds are mostly of a small size: 97% 
of  the  investments  concern  operations  of  less  than  €15  million.  The  French  funds  invest 
mainly in French targets: 86% of the investments are realized domestically.  

In terms of raised capital, the evolution is as follows: 

Investments (in € Mio) 

9,995 

12,730 

3,672 

5,043 

6,456 

2007 

2008 

2009 

2010 

2011 

1st Semester 2012 
1,794 

Source: www.afic-data.com / Grant Thornton 

The structure that attracts the most of the raised capital is the FCPR (around 83%) followed 
by the FCPI and FIP. 

Historically retail investors and family offices represent the biggest share of investor. While 
their investment diminished over the last years, they still represent the highest share (30%): 

Investor's type 

2008 - S1 2012, in € Mio 

Private investors / Family offices 

Banks 

Insurances 

Funds of funds 

Public sector 

Corporate investors 

EN 

7,505 

5,223 

4,199 

4,020 

3,331 

637 

86 

   EN 

 
 
 
 
Source: www.afic-data.com / Grant Thornton. The proportion of private investors in the first category is 74% for 
the data concerning the first semester of 2012. 

Private investors invest in all 3 available structures: FCPR; FCPI and FIP. When investing in 
FCPI and FIP private investors may benefit from tax deductions (from income tax and wealth 
tax)  which  may  explain  the  high  number  of  subscribers  (91’000  investors  in  2011)  in  these 
funds and the low average subscribed amount (€8’100). In total the FCPI and FIP collected 
€835 in 2011, about 13% of the total amount raised this year. 

EN 

87 

   EN 

 
 
ANNEX: FEEDBACK STATEMENT FROM THE PUBLIC CONSULTATION  

6. 
A  Consultation  Document94  was  published  by  the  European  Commission  on  26th  July  2012 
seeking the views of stakeholders on reforming the Undertakings for Collective Investment in 
Transferable  Securities  (UCITS)  Directive 
to  Product  Rules,  Liquidity 
Management,  Depositary,  Money  Market  Funds,  Long-term  Investments  consultation  on 
UCITS.  A  total  of  65  respondents  replied  to  section  of  the  consultation  on  long-term 
investments. The majority (43%) of the replies were provided by the respondents representing 
the asset management industry. This Annex analyses the responses and the possible options 
put forward by the respondents to the Consultation Document.  

in  relation 

DETAILED ANALYSIS OF THE RESPONSES 

1. What options do retail investors currently have when wishing to invest in long-term 
assets?  Do  retail  investors  have  an  appetite  for  long-term  investments?  Do  fund 
managers  have  an  appetite  for  developing  funds  that  enable  retail  investors  to  make 
long-term investments?  

EN 

88 

   EN 

 
 
 
 
 
 
86% of respondents to this consultation question expressed positive views about the appetite 
of retail investors for long-term investment opportunities. Only 5% of the respondents to this 
question  expressed  negative  views,  while  7%  were  of  the  opinion  that  appetite  is  currently 
low. 

Most  respondents  to  this  consultation  question  agreed  that  the  options  available  to  retail 
investors to invest in long-term assets were limited. Long-term investment opportunities were 
in  most  cases  limited  to  participations  in  non-fund  products  (pension  plans,  life  insurance 
plans or other retail structured products) or fund products outside the UCITS framework.  

Respondents  from  some  of  the  large  EU  Member  States  such  as  Germany  and  the  United 
Kingdom explained that retail investors have a number of investment opportunities available 
for  them  to  invest  in  long-term  assets.  Retail  investors  may  mostly  get  access  to  long-term 
investment via listed closed-ended funds or for certain assets classes such as real estate – via 
nationally  regulated  open-ended  funds  that  are  available  to  them.  Some  respondents 
mentioned indirect access to the financing of long-term infrastructure projects through funds, 
such as UCITS, investing a minor portion of their assets in debt or other instruments issued by 
national and supranational governments and institutions. Others mentioned direct investments 
into listed and unlisted companies and investments into real estate. 

Respondents  from  the  UK  stated  that  retail  investors  in  the  UK  had  a  broad  range  of 
investment  opportunities  to  invest  directly  or  indirectly  in  long-term  assets.  These  include, 
structured products, holdings of equities of companies involved in infrastructure or property 
(directly  or  through  funds),  corporate  bonds  or  social  sector  organisations,  real  estate 
investment  trusts,  shares  of  unlisted  companies  which  hold  renewable  assets  or  shares  in 
industrial  and  provident  societies.  These  respondents  referred  to  nationally-regulated  open-
ended funds and listed closed-ended investment companies that give retail investors access to 
real  estate,  commodities,  precious  metals  and  private  equity,  and  access  to  fund  of  funds 
whose underlying  are not UCITS. These types of vehicles are invested in generally, but not 
exclusively,  by  mass  affluent  and  high  net  worth  retail  investors.  According  to  these 
respondents, long-term investment products are popular among retail investors in the UK.  

Respondents from Germany explained that investment opportunities in long-term investment 
funds are currently offered by open-ended real estate funds (OEREFs) which can be launched 
as  retail  vehicles  eligible  for  public  marketing.  German  OEREFs  are  very  popular  among 
German  investors  and  comprise  roughly  EUR  83  billion  of  assets  under  management. 

EN 

89 

   EN 

 
 
According to one respondent, closed-ended funds present another option of investing in “real 
assets” available to German retail investors. These investment vehicles are currently lacking 
product  regulation,  but  will  be  subjected  to  product-related  rules  in  the  course  of  AIFMD 
implementation in Germany.  

A French asset manager confirmed the appetite of retail investors for long-term investments 
by reference to the popularity of open-ended real estate funds. This asset manager mentioned 
that the average length of investment in retail funds is often superior to 7 or 8 years.  

Question 1 - Do retail investors have an appetite for long-term investments?

Opinion expressed

Total

YES

APPETITE IS LOW

NO

UNCLEAR

Total

36

3

2

1

42

86%

7%

5%

2%

100%

Public 
Authorities
1

1

1

0

3

Investors

Retail

Institutional

2

0

0

0

2

1

0

0

0

1

Asset 
Manag.
23

2

0

0

25

Industry
Banking and 
Securities
1

0

0

0

1

Insurance

0

0

0

1

1

Mixed 
Organisations
6

0

0

0

6

Other

2

0

1

0

3

Most  of  the  respondents  (86%)  to  the  consultation  document  concluded  that  the  appetite  of 
retail investors for long term investments exits.  

A respondent representing the views of retail investors mentioned that retail investors would 
certainly need an investment proposition that provides them with the potential for sustainable 
and  long-term  investment  returns.  This  respondent  pointed  out  that,  although  investors 
currently have some options available for making long-term investments, the existing options 
are very limited and their benefits for investors are increasingly unclear. This respondent also 
complained that the investment sector lacked innovation and was driven by supply rather than 
demand. Respondent representative of the asset management industry confirmed the appetite 
of retail investors for long-term investments. On the other hand, a respondent representing the 
interests  of  institutional  investors  explained  that  retail  investors  are  not  willing  to  invest  in 
long-term investments except for real-estate. This respondent, however, pointed out that long 
term investments would remain a core business of institutional investors. 

Some respondents from the industry explained that there was a greater appetite for long-term 
investments coming from institutional investors. These respondents predicted that institutional 
investors'  appetite  is  expected  to  grow  at  a  faster  pace  than  that  of  retail  investors.  A 
respondent representing the interests of the asset management industry observed that, during 
the  current  turbulent  market  conditions,  wealthier  or  sophisticated  retail  investors  were 
seeking to diversify their portfolio by investing in new asset classes, such as real-estate and 
commodities,  as  these  were  less  correlated  to  the  financial  markets.  This  refuge  by  retail 
investors into less liquid and longer-term assets was also confirmed by asset managers. 

EN 

90 

   EN 

 
 
 
80% of respondents to this consultation question expressed positive views about the appetite 
of asset managers for offering or developing long-term investment opportunities. Only 7.5% 
of the respondents to this question expressed negative views, while 5% were of the opinion 
that appetite is currently low. 

Question 1 - Do fund managers have an appetite for developing funds that enable retail investors to make long-term investments?

Opinion expressed

Total

YES
APPETITE IS LOW
NO
UNCLEAR
Total

32
3
2
3
40

80%
7.5%
5%
7.5%
100%

Public 
Authorities
1
1
1
0
3

Investors

Retail

Institutional

0
0
1
1
2

0
0
1
0
1

Asset 
Manag.
24
1
0
1
26

Industry
Banking and 
Securities
0
0
0
0
0

Insurance

1
0
0
1
2

Mixed 
Organisations
4
0
0
0
4

Other

2
0
0
0
2

Most  respondents,  including  the  asset  managers  themselves,  agreed  that  fund  managers  are 
willing to develop long-term investment funds for retail investors. A respondent representing 
the  interests  of  retail  investors  explained  that  following  the  financial  crisis  the  appetite  of 
asset managers to offer long-term investment funds is not yet clear. This respondent argued 
that, typically, asset managers only design products if it benefits them to do so. 

Some replies received from supervisory authorities stated that there was currently no demand 
by  retail  investors  for  long-term  investments  or  that  demand  was  very  low  due  to  a  greater 
preference for liquidity. These public authorities explained that asset managers were not very 
keen to offer long-term investments in illiquid assets to retail investors. Another supervisory 
authority believed retail investors do have an appetite for long-term investments and argued 
that it could be reasonably assumed that asset managers would seek opportunities to develop 
products in this area. 

2. Do you see a need to create a common framework dedicated to long-term investments 
for  retail  investors?  Would  targeted  modifications  of  UCITS  rules  or  a  stand-alone 
initiative be more appropriate?  

EN 

91 

   EN 

 
 
 
 
 
 
81% of respondents to this consultation question expressed favourable views about the need 
to create a common framework dedicated to long-term investments for retail investors. Only 
7% of the respondents to this question expressed negative views, while 9% gave mixed views. 

Question 2 - Do you see a need to create a common framework dedicated to long-term investments for retail investors?

Opinion expressed

Total

YES
NO
IT IS TOO EARLY TO TAKE ACTION
OTHER
Total

48
4
2
5
59

81%
7%
3%
9%
100%

Public 
Authorities
3
2
1
2
8

Investors

Retail

Institutional

0
1
0
2
3

0
0
1
0
1

Asset 
Manag.
27
0
0
0
27

Industry

Banking and 
Securities
7
0
0
1
8

Insurance

1
0
0
0
1

Mixed 
Organisations
6
1
0
0
7

Other

4
0
0
0
4

Most respondents agreed that there was a need to create a common framework for long-term 
investments for retail investors. However, some of the replies indicated that it was too early to 
take action in this respect and that it was better to wait for further developments in national 
rules resulting from the implementation of the AIFMD or to consider long-term investment as 
a part of UCITS regime. 

A respondent representative of the interests of retail investors argued that they saw real merit 
in  developing  a  regime  that  provided  alternative  sources  to  bank  lending  for  small  and 
medium size companies. This respondent pointed out that a modified UCITS regime should 
enable  retail  investors  and  their  advisers  to  fully  understand  the  risk  /  reward  trade-off.    A 
respondent  representative  of  the  asset  management  industry  confirmed  the  need  to  create  a 
common  European  framework  dedicated  to  investment  funds  investing  in  less  liquid  assets 
with  the  inclusion  of  a  European  passport.  An  asset  manager  argued  that  developing  a 
framework for long-term investments would provide new solutions for financing the economy 
and  would  serve  to  benefit  Member  States,  enterprises  and  investors  in  these  challenging 
times. 

Only  few  of  the  respondents  were  of  the  opinion  that  there  was  no  need  for  a  common 
framework specifically designed for retail investors as the appetite of retail investors for such 
funds was low. 

EN 

92 

   EN 

 
 
 
 
52%  of  the  respondents  to  this  consultation  question  expressed  preference  for  a  stand-alone 
regime,  that  is,  a  regime  dedicated  to  long-term  investment  funds  that  is  independent  of 
UCITS  Directive  and  the  AIFMD.  On  the  other  hand,  16%  of  the  respondents  to  this 
consultation question were of the opinion that a long-term investment fund regime should be 
incorporated into the existing UCITS framework, while another 16% of the respondents did 
not express a clear preference between a stand-alone regime and targeted modifications to the 
UCITS rules. Only very few respondents were of the opinion that a regime dedicated to long-
term investments should be placed within the AIFMD. 

Question 2 - Would targeted modfications of UCITS rules or a stand-alone initiative be more appropriate?

Opinion expressed

Total

STAND-ALONE REGIME
UCITS CHANGE
AIFMD CHANGE
STAND ALONE REGIME OR UCITS CHANGE
STAND-ALONE REGIME OR AIFMD CHANGE
OTHER
Total

30
9
3
9
1
6
58

52%
16%
5%
16%
2%
9%
100%

Public 
Authorities
6
0
0
0
0
0
6

Investors

Retail

Institutional

0
0
0
0
0
3
3

0
0
0
0
0
1
1

Asset 
Manag.
15
5
0
6
0
2
28

Industry
Banking and 
Securities
4
2
1
1
0
0
8

Insurance

1
0
0
0
0
0
1

Mixed 
Organisations
2
1
1
2
0
1
7

Other

2
0
0
0
1
1
4

The  majority  of  the  respondents  favoured  a  stand-alone  regime  based  on  the  UCITS 
framework so as not to create confusion and to harm the well-established UCITS brand. The 
views expressed by some asset managers showed preference towards the creation of a distinct 
chapter  for  long-term  investments  within  the  UCITS  Directive  and  cautioned  against  the 
creation  of  an  overload  of  European  regulation  Other  respondents  agreed  with  both  of  the 
options,  that  is,  the  creation  of  a  distinct  chapter  within  the  UCITS  Directive  and  a  stand-
alone regime. Few of the respondents also suggested developing retail alternative investment 
funds  (AIFs),  that  is,  a  fund  regime  within  the  AIFMD    instead  of  modifying  the  UCITS 
regime.  

A respondent representing the interests of the asset management industry explained that long-
term investments by retail investors have no place within the AIFMD framework because the 
AIFMD was designed for a professional investor base. This respondent also emphasised the 
inadequacy  of  the  AIFMD  as  it  does  not  take  into  account  product  regulation  and  does  not 
provide  a  European  passport  for  retail  investors.  Asset  managers  also  confirmed  the 
inadequacy of the AIFMD covering long-term investments for retail investors and expressed 
preference for a new type of UCITS-like fund regime. 

EN 

93 

   EN 

 
 
 
 
3. Do you agree with the above list of possible eligible assets? What other type of asset 
should be included? Please provide definitions and characteristics for each type of asset.  

52% of respondents to this consultation question expressed the need for further clarification 
about the list of potential eligible assets mentioned in the consultation question. Most requests 
for clarifications were primarily related to the inclusion or exclusion of particular assets from 
the broad types of assets mentioned in the consultation paper. A respondent representative of 
the  asset  management  industry  expressed  preference  for  broad  categories  of  eligible  assets 
that  would  subsequently  be  further  defined  through  technical  standards  to  be  developed  by 
ESMA. 

Question 3 - Do you agree with the above list of possible eligible assets?

Opinions expressed

Total

YES
CLARIFICATIONS AND REFINEMENTS NEEDED
SHOULD BE NON-EXHAUSTIVE
NO
OTHER
Total

6
23
4
2
6
41

15%
56%
10%
5%
14%
100%

Public 
Authorities
1
0
1
0
1
3

Investors

Retail

Institutional

2
0
0
0
1
3

0
0
0
0
1
1

Asset 
Manag.
2
19
3
0
0
24

Industry
Banking and 
Securities
0
1
0
1
1
3

Insurance

1
0
0
0
0
1

Mixed 
Organisations
0
1
0
0
1
2

Other

0
2
0
1
1
4

Most respondents agreed in principle with the list of possible eligible assets mentioned in the 
consultation  document,  but  were  of  the  opinion  that  such  list  should  not  be  exhaustive  and 
open to additional asset classes in accordance with future market developments. The majority 
of  the  respondents  highlighted  the  need  for  flexibility  in  the  determination  of  the  eligible 
assets.  Some  of  the  asset  classes  or  instruments  mentioned  by  respondents  included:  bonds 
and shares (listed and unlisted), loans, direct commodity investments, direct and indirect real 
estate,  utilities  and  telecommunications,  energy  networks  and  storage,  energy  generation 
plants, etc. A number of respondents explained that investment in liquid assets should also be 
permitted as these are important for the purposes of proper liquidity management.  

4.  Should  a  secondary  market  for  the  assets  be  ensured?  Should  minimum  liquidity 
constraints be introduced? Please give details.  

EN 

94 

   EN 

 
 
 
 
 
The  views  of  the  respondents  to  this  consultation  question  were  split  as  50%  of  the 
respondents to this question were of the opinion that a secondary market for assets need not 
be ensured while the remaining were in favour (32%) or offered mixed views (18%).  

Question 4 - Should a secondary market for the assets be ensured?

Opinions expressed

Total

YES
NO
OTHER
Total

11
17
6
34

32%
50%
18%
100%

Public 
Authorities
0
1
1
2

Investors

Retail

Institutional

2
0
0
2

0
0
1
1

Asset 
Manag.
6
13
3
22

Industry
Banking and 
Securities
2
0
1
3

Insurance

1
1
0
2

Mixed 
Organisations
0
1
0
1

Other

0
1
0
1

Some  respondents  viewed  secondary  markets  as  an  advantageous  additional  solution, 
provided it were feasible to ensure. However, according to these respondents, the secondary 
market should not be compulsory for all eligible assets as they were of the opinion that it is 
usually difficult to ensure.  

Respondents  to  this  question  distinguished  between  ensuring  a  secondary  market  for  the 
assets in the fund from ensuring a secondary market for the shares or units in the fund held by 
investors.  Respondents  that  interpreted  the  consultation  question  as  referring  to  a  secondary 
market for the shares or units held by retail investors in the fund argued in favour of ensuring 
a secondary market for retail investors. These respondents believed that since the personal or 
financial situation of such investors may change over time, it was important to ensure an early 
redemption facility would be available. 

EN 

95 

   EN 

 
 
 
 
69%  of  respondents  to  this  consultation  question  were  in  favour  of  introducing  minimum 
liquidity  constraints,  while  17%  were  of  the  opinion  that  such  constraints  need  not  be 
introduced. 

Question 4 - Should minimum liquidity constraints be introduced?

Opinions expressed

Total

YES
NO
OTHER
Total

24
6
5
35

69%
17%
14%
100%

Public 
Authorities
1
0
0
1

Investors

Retail

Institutional

0
0
1
1

0
0
1
1

Asset 
Manag.
18
2
1
21

Industry
Banking and 
Securities
1
1
2
4

Insurance

0
1
0
1

Mixed 
Organisations
3
2
0
5

Other

1
0
0
1

Although the majority of the respondents to this consultation question were of the opinion that 
minimum  liquidity  constraints  should  be  introduced,  various  options  were  voiced  by  the 
respondents.  Some  suggested  that  liquidity  constraints  could  be  similar  to  those  under  the 
UCITS regime, such as by granting a right to investors to request redemptions on demand, but 
adapted to the long-term character of the investments. In other words, these respondents were 
in  favour  of  offering  less  frequent  redemption  opportunities  to  investors.  Some  respondents 
proposed building an extraordinary early redemption facility for retail investors in some form. 
According to these respondents, this option would work by creating semi-open fund structures 
that  enabled  investors  to  redeem  their  units  at  regular,  but  longer,  intervals.  A  respondent 
representative of retail investors argued that liquidity provided by a secondary market in some 
form is an essential feature for an efficient and safe market for retail investors.  

5.  What  proportion  of  a  fund's  portfolio  do  you  think  should  be  dedicated  to  such 
assets? What would be the possible impacts?  

EN 

96 

   EN 

 
 
 
 
 
82%  of  respondents  to  this  consultation  question  expressed  their  views  against  having  a 
predetermined proportion of an investment portfolio dedicated to long-term assets. 

Question 5 - Should the proportion of a fund's portfolio dedicated to long-term  assets be defined?

Opinions expressed

Total

YES
NO
OTHER
Total

4
28
2
34

12%
82%
6%
100%

Public 
Authorities
1
0
1
2

Investors

Retail

Institutional

0
1
0
1

0
1
0
1

Asset 
Manag.
2
19
1
22

Industry
Banking and 
Securities
1
1
0
2

Insurance

0
1
0
1

Mixed 
Organisations
0
4
0
4

Other

0
1
0
1

The majority of the respondents favoured flexibility and indicated that the exact proportion of 
a fund's portfolio should largely depend on the investment strategy and liquidity profile of the 
fund, and should be disclosed in its subscription documents.  

A  number  of  respondents  were  of  the  opinion  that  it  should  be  possible  for  closed-ended 
funds  to  be  invested  entirely  in  illiquid  assets.  Semi-open  ended  funds,  on  the  other  hand, 
would  require  a  certain  proportion  of  liquid  assets.  Others  suggested  that  a  maximum 
threshold of 80% of the fund's assets be reserved to long-term assets.  

A respondent representative of retail investors argued that the optimal investment allocation 
could vary depending on the risk and reward characteristics of the type of asset in question. 
This  respondent  also  explained  that  the  ability  of  investors  and  their  advisers  to  understand 
such risk and reward profile was equally important. A respondent representing the views of 
the asset management industry was also of the opinion that it was not possible to provide a 
clear-cut answer in such cases and that the composition of the portfolio varied depending on 
the investment objective of the fund and the level of liquidity promised to retail investors. 

6.  What  kind  of  diversification  rules  might  be  needed  to  avoid  excessive  concentration 
risks and ensure adequate liquidity? Please give indicative figures with possible impacts.  

EN 

97 

   EN 

 
 
 
 
 
90%  of  respondents  to  this  consultation  question  expressed  strong  views  in  favour  of 
diversification  requirements  for  the  avoidance  of  excessive  concentration  risk  and  ensuring 
adequate liquidity requirements. 

Question 6 - Should diversification rules apply?

Opinion expressed

Total

YES
NO
Total

27
3
30

90%
10%
100%

Public 
Authorities
1
0
1

Investors

Retail

Institutional

0
0
0

0
1
1

Asset 
Manag.
22
0
22

Industry
Banking and 
Securities
2
0
2

Insurance

1
1
2

Mixed 
Organisations
1
0
1

Other

0
1
1

Although  asset  managers  expressed  views  in  favour  of  risk  diversification,  a  respondent 
representative  of  institutional  investors  argued  against  mandatory  concentration  limits. 
According to this respondent, asset managers should enjoy the freedom to make investment 
allocations as they deemed appropriate, provided this was in line with the long-term objective 
of the fund and was clearly disclosed to investors prior to them investing in the fund.   

Question 6 - Should diversification rules apply?

Opinion expressed

UCITS STANDARD

NOT UCITS STANDARD

SHOULD BE ALLOWED TO FOCUS ON SINGLE INVESTMENTS

IT IS AN ESSENTIAL FEATURE OF FUND INVESTMENT

Total replied

Total

5

1

11

15

32

16%

3%

34%

47%

100%

Public 
Authorities
1

0

0

1

Investors

Retail

Institutional

0

0

0

0

0

0

0

0

Asset 
Manag.
4

0

11

12

Industry
Banking and 
Securities
0

1

0

1

Insurance

0

0

0

1

Mixed 
Organisatio
0

0

0

0

Other

0

0

0

0

More than half of the respondents (47%) noted that diversification is an essential feature of an 
investment  fund.    Although  most  respondents  considered  diversification  to  be  an  important 
feature of an investment fund, several respondents were also of the opinion that the level of 
diversification  was  dependent  upon  the  typology  of  the  fund.  Diversification  requirements 
were considered more pertinent for open-ended funds, whilst this was of less importance for 
closed-ended funds according to the views expressed by the respondents. 

A number of respondents also argued that, given the nature of longer-term investments, there 
should  be  the  possibility  for  single-asset  investments,  such  as  in  the  case  of  specific 
infrastructure or energy projects that require significant financing needs.  At the same time it 
was  suggested  that  in  such  cases,  additional  safeguards  should  be  applied  for  investor 
protection  at  the  distribution  level, especially  if  funds  are  intended  for  the  retail  market.    A 
number  of  respondents  (16%)  mentioned  UCITS  standards  may  serve  as  a  good  basis  for 
determining  which  principles  should  govern  risk  spreading  in  the  fund.  Other  stakeholders 

EN 

98 

   EN 

 
 
 
 
were  of  the  opinion  that  applying  UCITS  standards  in  this  space  would  not  serve  the  right 
purpose as the concentration of risks in an LTI fund maybe different to those of UCITS funds.  

7. Should the use of leverage or financial derivative instruments be banned? If not, what 
specific constraints on their use might be considered?  

92%  of  the  respondents  to  this  consultation  question  were  of  the  opinion  that  leverage  or 
derivative instruments should not be banned. 

Question 7 - Should the use of leverage or financial derivative instruments be banned?

Opinion expressed

Total

DERIVATIVES ARE IMPORTANT FOR MANA

25

SIMILAR RULES AS TO AN ACTUAL UCITS S

DERIVATIVES SHOULD BE BANNED FROM 

BORROWING UNDER CERTAIN CONSTRAI

Total replied

8

3

19

37

68%

22%

8%

51%

100%

Public 
Authorities
1

1

0

0

Investors

Retail

Institutional

0

0

1

0

0

0

1

0

Asset 
Manag.
21

6

0

16

Industry
Banking and 
Securities
2

0

0

1

Insurance

0

0

0

0

Mixed 
Organisations
0

0

0

0

Other

1

1

1

2

The majority of the respondents (68%) to this consultation question were of the opinion that 
derivative instruments were an important risk mitigation technique and that the mitigation of 
such risks via derivatives may be even more important for funds structured as having a long-
term  time  horizon  as  opposed  to  other  types  of  funds.  Currency,  inflation  and  interest  rate 
risks  were  mentioned  as  requiring  hedging  in  the  best  interest  of  investors.  Some  replies 
pointed out that the use of derivatives is already permitted by the current UCITS rules and a 
new  regime  for  long-term  investments  should  not  attempt  to  be  stricter  than  the  UCITS 
framework. 22% of the respondents suggested that derivative instruments should be allowed 
as part of efficient portfolio management and could possibly follow the principles applicable 
to the risk spreading of UCITS.   

Question 7 - Should the use of leverage or financial derivative instruments be banned?

Opinion expressed

Total

YES
NO
Total

3
33
36

8%
92%
100%

Public 
Authorities
0
1
1

Investors

Retail

Institutional

1
0
1

1
0
1

Asset 
Manag.
0
27
27

Industry
Banking and 
Securities
0
2
2

Insurance

0
1
1

Mixed 
Organisations
0
0
0

Other

1
2
3

EN 

99 

   EN 

 
 
 
 
 
 
Respondents representing the interests of institutional and retail investors were against the use 
of derivatives for speculative or investment purposes and argued that these should be banned 
from the list of eligible assets. One think-thank was also very critical of the use of derivatives, 
however, showed some leniency toward leverage.   

More  than  half  of  the  respondents  (51%)  were  of  the  opinion  that  borrowing  should  be 
permitted  but  subject  to  certain  constrains.  Leverage  through  borrowing  is  considered 
beneficial  and  in  certain  cases,  essential,  for  long-term  asset  classes  such  as  infrastructure. 
Given that infrastructure projects require a high degree of funding needs, respondents argues 
that leverage may be an indispensable instrument for the completion of infrastructure projects. 
One respondent argued in favour of limiting borrowing to a proportion of the fund’s assets. 

A  number  of  respondents  suggested  that  long-term  investment  funds  should  be  allowed  to 
borrow  on  a  permanent  basis  as  opposed  to  borrowing  of  a  temporary  nature  as  currently 
permitted under the UCITS framework.  

Several  respondents  also  agreed  that  retail  investor  protection  demanded  that  the  use  of 
leverage  or  financial  derivative  instruments,  although  permitted,  be  subject  to  certain 
limitations.   

8.  Should  a  minimum  lock-up  period  or  other  restrictions  on  exits  be  allowed?  How 
might such measures be practically implemented?  

94% of the respondents to this consultation question were of the opinion that minimum lock-
up periods or other restrictions on exits by investors in the fund should be permitted. 

Question 8 - Should a minimum lock-up period or other restrictions on exits be allowed?

Opinion expressed

Total

YES
NO
Total

34
2
36

94%
6%
100%

Public 
Authorities
1
0
1

Investors

Retail

Institutional

0
1
1

1
0
1

Asset 
Manag.
25
1
26

Industry
Banking and 
Securities
2
0
2

Insurance

1
0
1

Mixed 
Organisations
2
0
2

Other

2
0
2

The responses received from the industry and public authorities were largely in agreement on 
the need to permit minimum lock-up periods or other restrictions. Of a different opinion was a 

EN 

100 

   EN 

 
 
 
 
 
respondent representative of retail investors that expressed preference for incentives to retail 
investors  to  hold  on  to  their  investments  as  in  their  opinion  any  restrictions  on  capital 
withdrawal  would  reduce  the  attractiveness  and  the  trust  of  retail  investors  in  a  new 
investment  proposition.  A  respondent  representative  of  institutional  investors  expressed 
preference  for  permitting  temporary  lock-ups  in  the  event  of  an  emergency  and  to  be 
exercised under the control of local competent authorities. 

Considerations on the illiquid nature of long-term investment funds and the protection of the 
interests of all shareholders in the fund, led the vast majority of the respondents to favour the 
inclusion  of  mandatory  minimum  lock-up  periods  or  other  similar  restrictions.  Several 
respondents  were  of  the  opinion  that  redemptions  in  the  investment  fund  should  be  limited 
and that a balance should be struck between the interests of the investors and those of the fund 
manager.  

Although  a  clear  majority  of  the  respondents  favoured  minimum  lock-up  periods  and  other 
restrictions,  the  options  put  forward  by  the  respondents  varied  broadly.  Concern  was 
expressed about the protection of the remaining investors in the fund in order to ensure that 
these  are  not  disadvantaged  by  the  provision  of  liquidity  to  the  redeeming  investors. 
Respondents explained that maintaining a degree of liquidity in the fund to meet redemption 
requests involved diversification of investments in the fund. In this regard, respondents also 
cautioned that such diversification would require investment in liquid assets and that this may 
defeat  the  scope  of  the  investment  of  objective  of  an  LTI  fund,  that  is,  investment  in  long-
term illiquid assets.  

As to the minimum investment period, the views expressed by the respondents ranged from 
one month to a multi-year lock-up period, with options ranging from six months to one or two 
years  also  being  mentioned.  A  public  authority  opined  that  retail  investors  should  not  be 
irrevocably and unreasonably  bound to an  investment  in the fund for a long period of time. 
Respondents from both investors and the industry were of the opinion that, in the event of a 
regime open to retail investors, parameters should be defined which ensured retail investors 
would  be  able  to  redeem  their  interests  in  the  fund  in  the  event  of  unforeseeable 
circumstances.  Others  considered  that  no  conditions  should  be  imposed  upon  redemption 
requests made by retail investors for a prescribed and predetermined set of circumstances. 

One  respondent  suggested  that  a  formula  or  calculation  should  be  devised  that  permitted 
investors to redeem proportionately to the duration or the amount of the commitment made to 
the  fund.  Another  respondent  argued  that  early  withdrawal  may  be  permitted  except  if  the 
lock-up  period  is  inferior  or  equal  to  the  recommended  holding  period  for  that  particular 
product. Decreasing tax rates for longer holding periods was a solution already implemented 
for certain saving products in some Member States, argued a respondent representative of the 
interests of retails investors.  

Many emphasised that, regardless of the restrictions imposed upon investors in the fund, the 
focus should be on transparency and appropriate disclosures to investors. 

EN 

101 

   EN 

 
 
9.  To  ensure  high  standards  of  investor  protection,  should  parts  of  the  UCITS 
framework be used, e.g. management company rules or depositary requirements? What 
other parts of the UCITS framework are deemed necessary?  

98% of the respondents to this consultation question expressed their preference towards using 
the UCITS framework as a model for ensuring a high standard of investor protection. 

Question 9 - Should parts of the UCITS framework be used?

Opinion expressed

Total

YES
NO
Total

44
1
45

98%
2%
100%

Public 
Authorities
2
0
2

Investors

Retail

Institutional

1
0
1

1
0
1

Asset 
Manag.
34
0
34

Industry
Banking and 
Securities
3
1
4

Insurance

1
0
1

Mixed 
Organisations
0
0
0

Other

2
0
2

The views expressed on the robustness of the UCITS framework for achieving a high standard 
of  investor  protection  by  public  authorities,  investors  and  the  industry  were  largely  in 
alignment. 

Question 9 - Should parts of the UCITS framework be used?

UCITS standards to be used for LTI fund f

Total

MANAGEMENT COMPANY RULES

ORGANISATIONAL RULES

FUND PASSPORT 

REPORTING TO COMPETENT AUTHORITIE

DISCLOSURE TO INVESTORS

DEPOSITARY RULES

RISK MANAGEMENT

CASH MONITORING / LIQUIDITY MANAGE

INTERNAL AUDIT

PREVENTION OF CONFLICTS OF INTEREST

Total replied

14

17

7

12

18

13

15

8

11

2

37

38%

46%

19%

32%

49%

35%

40%

22%

30%

5%

100%

Public 
Authorities
1

1

1

0

1

2

0

0

0

0

Investors

Retail

Institutional

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

0

Asset 
Manag.
9

Industry
Banking and 
Securities
1

13

3

10

12

8

12

5

9

0

0

1

0

1

1

1

1

0

1

Insurance

0

0

0

0

1

0

0

0

0

0

Mixed 
Organisations
1

1

0

0

1

0

0

0

0

0

Other

0

0

0

0

0

0

0

0

0

0

Nearly  half  of  respondents  to  this  consultation  question  (49%)  were  of  the  opinion  that 
disclosure requirements under the UCITS framework are key to ensuring a high standard of 
investor  protection.  Clear  preferences  were  also  expressed  in  favour  of  incorporating  the 
organisational rules (46%), the rules on risk management (40%), depositary rules (35%), and 
reporting  requirements  (32%).    38%  of  respondents  were  of  the  opinion  that  the  rules 
applicable to management companies under the UCITS framework should be borrowed by the 
regime dedicated to long-term investments. 

EN 

102 

   EN 

 
 
 
 
 
Question 9 - Should parts of the UCITS framework be used?

UCITS standards: what should be differe

Total

MARK-TO-MARKET

INVESTMENT AND BORROWING RESTRICT

PROVISIONS FOR REDEMPTION

ELIGIBLE ASSETS

LIQUIDITY

DEPOSITARY RULES

Total replied

1

1

5

18

1

2

37

3%

3%

14%

49%

3%

5%

100%

Public 
Authorities
0

0

0

1

0

0

Investors

Retail

Institutional

0

0

0

0

0

0

0

0

0

0

0

0

Asset 
Manag.
1

1

5

15

1

2

Industry
Banking and 
Securities
0

0

0

2

0

0

Insurance

0

0

0

0

0

0

Mixed 
Organisations
0

0

0

0

0

0

Other

0

0

0

0

0

0

The vast majority of respondents to this consultation question favoured an investor protection 
framework similar to that offered by the UCITS Directive but that it should take into account 
the features of long-term investments.  

Nearly half of respondents (49%) to this consultation question mentioned that the eligibility 
of assets requirements under the UCITS Directive would not allow them to invest in the assets 
contemplated  by  this  initiative.  It  was  therefore  suggested  that  the  UCITS  eligibility 
requirements  not  be  reproduced  in  an  eventual  proposal  or  be  broadened  to  include  the 
possibility of direct investments in illiquid assets or the inclusion of other asset classes, such 
as loans. 

The parts of the UCITS framework that respondents believed should be used as a model for 
an  LTI  regime  included  the  organisational  requirements,  the  rules  on  risk  management, 
reporting requirements, the provisions on the management company passport and the fund or 
product passport.   

10.  Regarding  social  investments  only,  would  you  support  the  possibility  for  UCITS 
funds to invest in units of EuSEF? If so, under what conditions and limits?  

43% of the respondents were not in favour of broadening the UCITS eligible asset classes to 
include direct investments in EuSEFs. 

Question 10 - Regarding social investments only, would you support the possibility for UCITS funds to invest in units of EuSEF? 

Opinion expressed

Total

YES
NO
Total

21
16
37

57%
43%
100%

Public 
Authorities
1
0
1

Investors

Retail

Institutional

1
0
1

1
0
1

Asset 
Manag.
17
13
30

Industry
Banking and 
Securities
1
2
3

Insurance

0
0
0

Mixed 
Organisations
0
0
0

Other

0
1
1

EN 

103 

   EN 

 
 
 
 
 
 
Although  a  majority  of  the  respondents  to  this  consultation  question  were  in  favour  of 
permitting  investments  in  EuSEFs,  they  were  primarily  only  in  favour  of  permitting  such 
investments under a new LTI regime. Although the views of asset managers were split on this 
issue, investors and public authorities were willing to permit retail access to EuSEFs via the 
UCITS  brand.  Few  respondents  believed  UCITS  should  be  permitted  to  invest  in  EuSEFs 
provided this was clearly disclosed to investors.  

While  one  respondent  representing  the  interests  of  institutional  investors  argued  that 
investments  in  EuSEFs  were  already  permitted  under  the  UCITS  framework,  another 
respondent  representing  the  interests  of  retail  investors  took  a  more  cautious  approach  and 
expressed  that,  although  there  was  merit  in  permitting  access  to  this  asset  class  by  retail 
investors,  the  further  development  of  the  framework  would  need  to  be  assessed.  This 
respondent  also  argued  that  the  priority  for  developing  a  regime  that  gave  retail  investors 
access  to  such  asset  classes  should  be  to  ensure  there  was  clear  labelling  of  funds  and 
adequate disclosure to enable investors to identify the funds that are best suited to their needs.  

7. 
ANNEX: FEEDBACK STATEMENT FROM THE INFORMAL QUESTIONNAIRE 
It  emerged  from  the  above-mentioned  consultation95  that  a  strong  majority  of  respondents 
favoured  a  stand-alone  regime  dedicated  to  the  long-term  investments  separate  from  the 
UCITS.  The  Commission  services  took  note  of  this  and  started  exploring  the  options  for  a 
possible  new  legal  framework  which  would  permit  investments  in  certain  alternative  assets. 
Seeking to gather views from a broader range of stakeholders on the features that would make 
LTIFs attractive for the investors and useful for the investment targets, on 15 of January 2013 
the  Commission  services  circulated  an  informal  Questionnaire.  This  Annex  sums  up  the 
responses to the Questionnaire and records the expressed preferences on a new fund regime 
for the long term investments.  

General remarks and posed questions 

The  Questionnaire  posed  five  groups  of  questions.  The  first  four  groups  were  aimed  at 
establishing  the  profiles  of  respondents.  It  was  asked  to  identify  what  type  of  entity  the 
respondent was, what activities it was engaged in, in which field it was active et etc. Investors 
and  fund  managers  were  asked  about  their  business  practices,  in  particular  about  their 
investment targets, financial instruments they use for long-term investing and factors that they 
take  into  account  when  making  investment  decisions.  Sections  i)  –  iii)  sum  up  those 
responses.  

The  fifth  group  of  questions  was  addressed  to  all  respondents  enquiring  about  their 
preferences  on  a  possible  design  of  the  LTIF  framework.  In  some  cases  the  Questionnaire 
posed multiple choice questions. Often respondents would mark all or some of the presented 
options  or  would  omit  answering  a  particular  question  altogether.  Some  of  the  expressed 
preferences  were  explained  in  detail  and  other  remained  unelaborated.  Some  respondents 
replied to the questions, which were not meant to be addressed to them and this was taken into 
account when summarising results of this consultation. One can conclude on the basis of the 
received replies that there are diverging views on most of the aspects of the envisaged fund 
regime. Consequently, the results of this consultation must be read in this context. 

I. Respondent profiles  

EN 

104 

   EN 

 
 
 
 
As in the previous consultation, the majority of the received 55 responses came from the asset 
management  industry  (53%)  (Fig.  1).  Institutional  investors  (16%),  infrastructure  providers 
(7%), mixed entities (11%)96 and retail investor representatives 97 (4%) provided views based 
on their experience (Fig. 1).  

Figure 1: 

The breakdown of respondents by country demonstrates a wide geographic coverage (Fig. 2). 
Many participants of this consultation are based in France, UK, Belgium and a fewer of them 
are established in other Member States or in the third countries.  

Figure 2: 

69%  of  respondents  confirmed  that  they  operate  ‘cross-border’,  4%  admitted  working 
confined to the Member State of establishment and the remainder skipped this question.  

i) Investors 

EN 

105 

   EN 

 
 
 
 
The  questions  addressed  to  investors  were  answered  not  only  by  institutional  investors  but 
also  by  some  fund  managers  or  their  associations98.  Thus  instead  of  deriving  inaccurate 
percentages, the results are presented by a number of responses.  

27 respondents stated that they are making direct investments in infrastructure. 22 replied that 
they take an equity stake when participating in long-term projects, 18 provide debt financing 
and  16  prefer  investing  via  funds  (Fig.  3).  Some  respondents  mentioned  that  guidelines  of 
some institutional investors do not allow direct investments into projects and debt financing 
thus  making  them  turn  to  investment  funds  when  seeking  exposure  to  illiquid  assets. 
Combined public and private financing, loans, joint ventures and mezzanine instruments were 
listed as other forms of participation.  

Figure 3: 

Many investors (19) target infrastructure and make specific reference to energy (11), transport 
(10) and social projects (10) as being of their particular interest (Fig. 4). Given that a number 
of  real  estate  funds  and  their  associations  participated  in  this  consultation,  investments  in 
housing (12) and other real estate, such as commercial property or land (8), were mentioned 
as separate groups of investment targets.    

Figure 4: 

EN 

106 

   EN 

 
 
When making investment decisions the respondents said taking into account a lot of different 
factors, including regulatory safety, a return profile, various risks, such as volume, manager or 
political risk (Fig. 5). Although 15 replies mentioned that liquidity is an important element, it 
was often considered to be of a lesser relevance than the risk evaluation and the prospect of a 
return.    Cash  flow  stability,  financial  robustness  of  the  project,  capital  charge,  valuation 
method,  ESG  and  a  number  of  other  aspects  were  occasionally  mentioned  by  individual 
participants as relevant for making allocations.   

Figure 5: 

Responses  were  not  unfavourable  to  investing  through  the  funds.  One  (1)  respondent 
considered costs as an obstacle for investing via funds, four (4) mentioned that it is difficult to 
find the right funds with the desired longer investment time horizon. Lack of transparency and 
poor reporting by the funds were identified as discouraging factors for investing indirectly.  
ii) Investment managers and intermediaries99 

74% of respondents to this group of questions stated that they manage long-term investment 
funds  with  6%  saying  that  they  do  not.  15%  of  fund  managers  informed  that  they  are 
managing  only  open-ended  funds,  26%  -  only  closed  ended  funds  and  29%  confirmed  that 

EN 

107 

   EN 

 
 
 
they  have  both  types  of  funds  under  their  management.  The  remainder  did  not  provide 
specific information in this respect. 

38% mentioned that they are directly investing in real estate assets. 35% respondents targeting 
infrastructure investments took a stake in equity of, for example project companies, invested 
in debt 20% or loans 9% (Fig. 6).   

Figure 6: 

Majority  of  asset  managers  (68%)  stated  that  their  funds  are  serving  only  institutional 
investors, and 24% are managing funds accessible to the retail population, 9% of which are 
focusing  on  investments  in  real  estate  and  others  –  on  renewable  energy  projects,  venture 
capital, social and other investments. 

Ten  (10)  respondents  stated  that  open-ended  funds  that  they  manage  do  operate  redemption 
facility ranging from daily to annual frequency depending on the fund. 17 respondents noted 
that their closed-ended funds do not offer direct redemption opportunities before the maturity 
of the fund. Secondary transaction within the fund is often mentioned as an option for those 
willing to disinvest.  

iii) Investment beneficiaries 

Four  infrastructure  providers  participated  in  this  consultation  sharing  valuable  views  of  the 
receiving  end  of  the  financing.  Three  (3)  of  them  informed  that  they  are  active  in  realising 
energy  and  transport  projects  (energy  performance  contracting,  electricity  transmission, 
renewable energy, tunnels, roads, bridges, seafront, high speed trains, metro et etc.), one (1) is 
building  social  infrastructure  (schools,  hospitals,  universities  et  etc.)  and  two  (2)  identified 
other activities which do not fall within the latter categories.  

Three (3) respondents agreed that their projects last a rather long period of time and pointed to 
a  16-21  year  period,  which  sometimes  stretches  to  30,  as  a  normal  time  horizon  for  the 
financing  of  projects  in  their  field  of  activity.  One  infrastructure  provider,  whilst  agreeing 
with  the  majority  that  some  projects  may  last  up  to  20  years,  noted  that  ultimately  this 
depends on the project, which may take, for example, 5 years to complete.  

EN 

108 

   EN 

 
 
 
According  to  all  four  (4)  respondents,  investors  take  stake  in  their  projects  though  equity 
participations. According to three (3) of them bank loans and market debt are also frequently 
used  to  finance  their  works.  Two  (2)  respondents  mentioned  investment  funds  or  public 
financing as other sources of funding.   

When asked what the reasons for having failed to secure funding from investment funds could 
have  been,  two  (2)  participants  mentioned  unattractive  risk/return  profile  and  unstable 
regulatory system as the factors, which might have contributed to such impediment. One (1) 
opinion referred to new technology and long construction periods as potential deterrents. One 
(1)  respondent  observed  that  many  banks  have  withdrawn  from  financing  such  projects  and 
this prompts looking for other sources of funding.  

II. Views on the possible LTIF framework 

The above-described stakeholder pool was invited to express views on a possible calibration 
of the LTIF framework. Sections below summarise the communicated preferences.  

1. What type of investors should be eligible to invest in the fund? 

i) Institutional investors ii)   High-net-worth investors   iii) Retail investors 

38% of respondents to the Questionnaire were in favour of allowing access to LTI funds to all 
investor  groups,  including  retail  investors,  as  opposed  51%  who  considered  that  such  funds 
would  be  suitable  only  to  institutional  and  high-net-worth  investors,  given  illiquidity  of  the 
underlying and other risks arising from this type of assets (Table 1). Infrastructure providers’ 
choice was explained by the ease in dealing with professional investors.  

It should be observed that a representative of retail investors (1) was in favour of opening up 
the market to this investor group. This aligns with the opinion of many fund managers who 
feel that retail population is increasingly seeking to deploy capital for longer-term and are not 
necessary willing to bear the costs of liquidity. This group is said to have not much choice in 
this respect.  

A few drew attention to the distinction between investment targets noting that real estate and 
infrastructure projects may have different time horizons and thus would require different level 
of capital commitment. The retail demand, in their opinion, would depend on the underlying 
and on the liquidity profile of the fund.     

Table 1: 

INVESTOR ACCESS TO LTIFS

ONLY INSTITUTIONAL INVESTORS

ALLOW INSTITUTIONAL AND HNW INVESTORS

ALLOW ACCESS TO ALL INVESTORS

Total respondents

17
11
21

31%
20%
38%

0
0
1

55

100%

4
1
3

7

9

12

2

1

3

Total

Investors

Industry

Retail

Institutional

Asset 
Manag.

Mixed 
entities

Infrustruct
ure 
providers
2
0
0

Other

2
0
2

2 .What type of assets should be permitted in the LTIFs? 

i) Debt financing ii) Equity financing iii) Indirect investments iv) Other forms of participation 

Respondents (53%) were most positive about equity participations as assets permitted in the 
LTIFs (Fig. 7). A good support was lent to debt financing as well as indirect investments in 
other  funds  (33%  for  both),  although  there  were  a  few  negative  opinions  expressed  against 

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permitting ‘funds of funds’ in the LTIF framework, one of them pointing out to the resulting 
several layers of managements fees.  

21% considered that any assets should be considered as eligible assets and that no restriction 
was  necessary  to  this  effect.  The  fund  manager  should  be  left  to  decide  this  in  accordance 
with the Fund’s prospectus and project needs. A few respondents mentioned mezzanine and 
mortgage  loans  (9%),  unleveraged  acquisition  of  assets,  real  assets,  shares  of  unlisted 
companies and participation notes as items which should be allowed in the portfolio.  

A  few  reservations  were  expressed  regarding  securitisation  and  long-term  infrastructure 
financing in general as being not suitable for the funds accessible to individual investors. 

Figure 7: 

3. What types of investment targets should be permitted? 

i) Infrastructure investments ii) Any investments with longer maturities   iii) Other  

Almost half of respondents agreed that LTIFs should be allowed to target infrastructure and/or 
any investments with longer-term maturities (Fig. 8). The point was made in some replies that 
the “infrastructure” concept has multiple facets and might include a wide range of greenfield 
and brownfield projects, infrastructure technology and possibly other specific segments such 
as  environmental,  energy,  transport,  telecommunications  and  social  projects,  which  would 
make it difficult to define eligible assets for the regulatory purposes.  

18%  of  answers  supported  inclusion  of  real  estate  in  the  LTIF’s  portfolio  owning  to  the 
experience  of  a  number  of  respondents  who  are  already  active  on  this  market.  One  (1) 
respondent noted that investments funding real economy should be the primary focus of the 
LTIFs.  

Figure 8: 

EN 

110 

   EN 

 
 
 
 
4.  If  longer-term  investments  were  to  be  limited  only  to  those  with  certain  maturities, 
what threshold might be appropriate?  

i)  Only  investments  with  a  maturity  +10  years  ii)  Only  investments  with  a  maturity  +  20  years  iii) 
Other possible maturity? 

The views on this issue were again divided (Table 2). Half of respondents (50%) would agree 
with applying on LTIFs restricting maturities ranging from 5 to 20 years. Some argue that this 
is important in order to clearly distinguish LTIFs from other funds. Such a requirement could 
also send a clear message about the fund’s limited liquidity profile.  

25%, including representatives of retail investors, however, would advocate against regulating 
this aspect reasoning that different projects have different maturities and acquiring an interest 
in a longer term asset does not mean that under certain conditions it cannot be sold. Attention 
was drawn to different holding expectations for infrastructure and real estate investments the 
latter’s  falling  within  a  5-10  years  span.  In  the  opinion  of  some  respondents,  it  would  be 
enough  to  require  that  acquired  assets  have  longer  maturities  and  that  they  are  not  publicly 
listed or to allow longer lock-up periods. These could be the features pertaining to the LTIFs 
brand.  

Table 2: 

INVESTMENT MATURITY THRESHOLDS FOR LTIFs

ONLY +10/15 YEARS

ONLY +20 YEARS

AROUND 5 YEARS

DEPENDING ON THE TARGET INVESTMENT

Total

Investors

Industry

Retail

Institutional

Asset 
Manag.

Mixed 
entities

15
10
3
14

27%
18%
5%
25%

0

0

0

2

5

1

1

1

7

4

2

9

1

2

0

1

Infrustruct
ure 
providers
2

2

0

0

Other

0

1

0

1

Total respondents

55

100%

5. Should shorter-term investments be allowed in the LTIFs’ portfolio? 

Views varied on the issue whether shorter term investments should be permitted in the LTIFs’ 
portfolio (Table 3). A few did not find it a relevant aspect; 22%  expressly suggested different 

EN 

111 

   EN 

 
 
 
 
 
 
 
degrees  of  limitation  (from  10%  to  50%)  in  order  to  ensure  that  a  bespoke  LTIF 
predominantly  contains  assets  with  longer-term  maturities.  17%  (15%  +2%)  suggested  that 
the exact proportion of the permitted shorter-term investments should depend on the precise 
composition of the fund, in particular whether it is a closed-ended or open-ended fund, and on 
its redemption policy. 13% was clearly against any imposed limitation in this respect.  

Table 3: 

Total

Investors

Industry

% OF THE PERMITTED SHORTER TERM INVESTMENTS

Retail

Institutional

Asset 
Manag.

Mixed 
entities

NO LIMITATION

50%

20% -30 %

10%/SMALL

DEPENDING ON THE REDEMPTION RIGHTS

DEPENDING ON THE FUND

OPPORTUNISTICALLY

NOT ALLOWED

Total respondents

7
1
4
7
1
8
1
4

13%
2%
7%
13%
2%
15%
2%
7%

0

0

0

0

1

0

0

0

55

100%

2

1

1

2

0

0

0

0

4

0

2

4

0

7

1

1

1

0

0

0

0

0

0

1

Infrustruct
ure 
providers
0

0

1

1

0

0

0

0

Other

0

0

0

0

0

1

0

2

6. Should diversification of investments be required?  

A bit more than a half of respondents (51%) were of the opinion that diversification should be 
prescribed by the fund rules (Fig. 9). A few replies (9%) were negative in this respect some of 
them noting that single investments should be permitted due to the scale of funding required 
by  certain  projects.  A  large  part  of  responses  (40%)  was  not  explicit  on  this  question 
providing elusive reflections or skipped the question altogether.  

Figure 9:  

Table  4  below  records  expressed  diversification  preferences.  24%  (11%  +  13%)  would 
approve of diversification ranging from 3 to 15 counterparties. Some respondents (9%) (5% + 
4%) suggested specific concentration limits in the range from 15% to 25% of the portfolio.  

13% considered that no regulatory requirement should be imposed in this respect. 4% stood 
clearly against diversification being required from the funds that are open only to institutional 
investors  with  13%  acknowledging  that  this  is  only  relevant  for  the  funds  suitable  for 
individual  investors.  16%  of  respondents  considered  that  ultimately  the  extent  of 

EN 

112 

   EN 

 
 
 
 
diversification will depend on the bespoke fund and the underlying assets. It was suggested to 
calibrate  this  aspect  in  the  light  of  the  fact  that  the  pool  of  available  target  investments  is 
smaller  than  in  the  case  of  traditional  assets.  A  sufficient  ramp-up  period  was  said  to  be 
necessary in certain cases if diversification was made mandatory. An idea was expressed that 
there  should  be  no  mix  of  debt  and  equity  in  the  same  fund  in  order  to  avoid  conflict  of 
interests.  

Table 4: 

DIVERSIFICATION OPTIONS

NO, LEAVE IT TO THE FUND MANAGER

MINIMUM 3-5 INVESTMENTS

MINIMUM 10-15 INVESTMENTS

ONLY FOR RETAIL INVESTORS

~ 15 % CONCENTRATION

~ 20-25% CONCENTRATION 

YES, BUT IT DEPENDS ON THE FUND

NO RESTRICTION FOR PROFESSIONAL INVESTORS

Total

Investors

Industry

Retail

Institutional

Asset 
Manag.

Mixed 
entities

7
7
6
7
3
2
9
2

13%
13%
11%
13%
5%
4%
16%
4%

0

0

0

0

0

0

1

0

0

1

5

1

0

0

1

0

4

6

0

6

2

2

4

2

1

0

0

0

0

0

0

0

Infrustruct
ure 
providers
1

0

1

0

1

0

0

0

Other

1

0

0

0

0

0

3

0

Total respondents

55

100%

7. Should investors have redemption rights?  

i)  Periods  less  than  a  year  ii)      Yearly        iii)  Some  longer  set  period      iv)  No  rights  from  the  fund 
manager     v) Other approaches (e.g. relying on or requiring secondary trading of units in the fund) 

14%  (9%  +  5%)  of  respondents  sided  with  the  idea  that  a  longer  or  shorter  period  of 
redemption facility falling within one year’s span should be provided by the fund managers 
with  7%  viewing  this  as  a  feature  pertaining  only  to  open-ended  funds.  Respondents 
mentioning  periods  around  one  year  had  a  particular  concern  for  retail  investor  population. 
Some (9%) stated that different redemption periods for retail and professional investors could 
be justified. Other respondents considered that redemption policy should be decided in view 
of the underlying assets and it is difficult to prescribe one in abstract.  

Questionnaire  responses  show  differences  over  whether  redemptions  should  be  permitted., 
Only 38% of respondents explicitly supported yearly or longer redemption. By contrast, 48% 
of responses explicitly supported a closed-ended model. 35% pointed to secondary trading as 
a way of satisfying disinvestment calls. A number of replies (15%) mentioned liquidity buffer 
as  a  way  of  allowing  redemptions,  but  it  was  criticized  by  other  participants  of  this 
consultation (7%) as being liable to reduce actual exposure of the fund to the long term assets, 
diluting  performance  and  resulting  in  liquidity  costs  that  all  investors  would  be  forced  to 
accept.  A  few  mentioned  gates  or  queuing,  borrowing  or  extraordinary  early  redemption 
facility for retail investors as possible means of providing some liquidity. 

Table 5: 

EN 

113 

   EN 

 
 
 
 
REDEMPTION FACILITY OPTIONS

<1 YEAR 

YEARLY/AFTER A FEW y. LOCK-UP

LONGER PERIOD

DEPENDS ON THE FUND

DIFFERENT FOR RETAIL AND INSTITUTIONAL INVESTORS

ONLY FOR OPEN ENDED FUNDS

NO REDEMPTION RIGHTS

LIQUIDITY BUFFER

REQUIRED LISTING

EXPLORE/RELY ON SECONDARY TRADING

Total

Investors

Industry

Retail

Institutional

Asset 
Manag.

Mixed 
entities

5
3
13
7
5
4
5
8
2
19

9%
5%
24%
13%
9%
7%
9%
15%
4%
35%

0

1

0

0

1

0

0

0

0

1

0

0

4

0

0

0

1

1

0

8

4

2

4

6

3

4

2

2

1

6

1

0

2

1

0

0

1

4

0

2

Infrustruct
ure 
providers
0

0

1

0

0

0

0

0

1

1

Other

0

0

2

0

1

0

1

1

0

1

Total respondents

55

100%

8. Should transparency requirements (e.g. look-through) apply? 

Many  respondents  (45%)  considered  transparency  to  be  an  important  aspect  of  the  fund 
framework  (Fig.  10).  Some  identified  different  needs  of  different  investor  groups,  but  in 
principle there was an agreement that investors can only benefit from a proper reporting and 
disclosure.  Negative  opinion  on  this  matter  referred  to  the  currently  applicable  disclosure 
rules  being  sufficient  and  hence  there  was  no  need  for  additional  regulation  in  this  respect. 
Half of respondents considered this question to be not sufficiently clear or omitted replying to 
it for other reasons.  

Figure 10:  

9.  Which  fund  features  should  be  regulated  and  which  should  be  left  to  contractual 
arrangements? 

A wide range of suggestions was received on various aspects that stakeholders would like to 
see harmonised by the LTIFs framework. A number of respondents (17%) considered that the 
LTIF’s  product  rules  should  sit  within  the  AIMFD  framework  (Fig.  11).  A  few  (9%) 
suggested  benefiting  from  certain  UCITS  rules  that  would  be  appropriate  if  LTIFs  were 
calibrated to suit retail investors. Transparency and disclosure requirements, defining eligible 
assets,  risk  management,  diversification  requirements,  borrowing  restrictions,  redemption, 
liquidity and governance were mentioned by one (1) to three (3) respondents as the features, 

EN 

114 

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which should be defined by legislation, often considering protection of individual investors. It 
was  also  suggested  to  qualify  LTIFs  as  complex  products  under  MIFID.  Most  of  the 
respondents  generally  advocated  leaving  sufficient  freedom  for  contractual  arrangement 
between managers and investors. 

The  largest  number  of  respondents  called  for  adapting  prudential  requirements  (17%)  and 
aligning tax regimes throughout the EU (15%) in order to make LTIFs interesting to invest in. 

Figure 11: 

EN 

115 

   EN