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Regulatory comment: Capital Markets Union – the opportunities ahead

18 September 2015

The European Commission is considering a raft of initiatives to unlock investment in Europe’s companies as alternatives to bank finance. This article explores the potential opportunities for providers of capital to private companies.

The Capital Markets Union (CMU) is one of the three legs of the new European Commissioners’ Investment Plan unveiled by the Commission’s President, Jean-Claude Juncker, shortly following his inauguration in November 2014.

The objective of CMU is to further develop and integrate capital markets within the European Union to cut the cost of raising capital, notably for SMEs, and to help reduce dependence on bank funding.

In February 2015, the Commission published a Green Paper with a series of questions seeking views on early policy initiatives and obstacles to more integrated capital markets. A conference followed in June with Commissioner Hill promising to publish an Action Plan in September. The "building blocks" for CMU are due to be put in place by 2019, when the current Commissioners come to the end of their 5 year term.

A European Long-Term Investment Fund (ELTIF) is a new type of authorised alternative investment fund (AIF), being itself authorised under the ELTIF Regulation, whilst its manager must be a full scope EU AIFM. For further details, see here.

The structure for ELTIFs was in place well in advance of the Investment Plan, with the Commission issuing the original proposal in early 2013, albeit that it was not until 29 April 2015 that the ELTIF Regulation was adopted.

The Regulation becomes applicable in all Member States from 9 December 2015. ELTIFs are identified in the Green Paper as a priority area, which should boost long-term investment, and so the take-up of ELTIFs is to be encouraged.

One step that should assist was announced by Commissioner Hill in a speech at the CMU Conference in June - that the Solvency II delegated acts will be amended to permit insurance companies to invest into ELTIFs.

The ELTIF Regulation envisages that ELTIFs may be listed, but how attractive ELTIFs may be as a structure for a quoted company that invests in private equity assets is questionable An ELTIF is required to have a fixed life, sufficient in length to cover the life-cycle of each of its assets.

ESMA, in its recently published draft Regulatory Technical Standards for ELTIFs, proposes that at the time an application for authorisation as an ELTIF is made, the life of the ELTIF has to be determined by reference to the individual asset in its projected portfolio that has the longest life-cycle which will impact on the life-cycle of assets acquired after launch.

Also, although ELTIFs will have the option of a marketing passport for retail investors as well as professionals provided they meet additional investor protection requirements, these requirements are onerous, including as regards the depositary, which will significantly limit the choice of depositaries.

The ELTIF manager must specifically assess whether the ELTIF is suitable for marketing to retail investors. This is in addition to the appropriateness test that MiFID II will require.

There are other proposals in the CMU which may be more beneficial to listed private equity companies, and ultimately their shareholders. The current review of the Prospectus Directive focuses on reducing costs and regulatory burdens.

This may result in reducing the requirement for a prospectus for a secondary issue and possibly a simplified prospectus regime for SMEs. Proposals for amendments are due from the Commission “in the autumn”.

For the time being, it is a question of "watch this space".

This article was written by Victoria Younghusband. For more information please contact Victoria on +44 (0)20 7427 6707, or at victoria.younghusband@crsblaw.com

This article was first published in LPEQ Listed Private Equity Brief, September 2015.