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Cross-border EU fund vehicles boom

22 December 2016

A variety of EU fund vehicles have sprung up in recent years and some are now experiencing rapid crossborder growth, finds Paul Golden, but home-country bias still dominates

Read more: ICAV ELTIF RAIF FCP SICAV Dublin Luxembourg

There has been a mixed response from investors to recent European fund vehicle launches, with investors in many countries retaining a bias towards buying domestically-domiciled products.

The structure generating the most excitement in the UK is the Authorised Contractual Scheme (ACS), which brings the UK into line with the tax advantages offered in Luxembourg and Dublin in so-called tax-transparent funds.

A Northern Trust survey of UK-based finance professionals found that around half expected the value of UK ACS funds under management to exceed £250bn by next year, with almost a quarter predicting that as much as £500bn could be invested by the end of 2017.

A spokesperson for the Investment Association says there is growing interest in this structure, most notably from the pensions sector as an alternative to master trust funds and as a pooling vehicle for local government pension schemes, with the 89 schemes in England and Wales set to merge into six super funds in the next few years.

As of the end of October, 78 ACS funds had been authorised by the FCA. There is potential for very large assets levels to be gathered once the market has adjusted to what the structure offers, suggests Calisan, adding that apart from tax benefits, the ACS also offers a wide range of transparency advantages across fund rationalisation, regulatory reporting and distribution.

BNP Paribas Investment Partners head of external distribution UK Mike Woolley says the vehicle has proved to be more popular with charities and pension funds than with private investors "for whom the administrative requirements have posed challenges".

However, HSBC head of tax product securities services Ed Turner says this is not indicative of failure in the vehicle’s design.

Uncertainty in the UK fund market as a result of Brexit means the government’s plan to create an ideal UCITS master-feeder structure has taken a blow, continues Turner.

"Those asset managers previously looking at the ACS for UCITS master-feeder structures for cross-border distribution may now be forced to instead look at similar vehicles in Europe. That said, without the ACS local government pension scheme and UK life company assets would be flowing offshore."

In a separate move by the UK, in June the Treasury published a response to feedback on its July 2015 proposals to amend UK limited partnership law, with the intention that the changes would be fully operational within a year. The objective is to promote the UK limited partnership as a market standard structure for European private funds and maintain and enhance the UK as a competitive fund domicile.

According to Sascha Calisan, head of fund distribution support at Northern Trust, this vehicle has the potential to help the UK make up ground on Ireland and Luxembourg as an international funds base, particularly in the private market investment space.

"The partnership structure is more recognised in the US than in the mainstream European financial centres, but there will always be a good use for the structure, particularly for institutional or more sophisticated investors," she says. "With appropriate government support, it will provide a flexible and transparent alternative to existing vehicles."

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