Barriers to the “retailisation” of alternative funds in EU, despite push for harmonisation

Barriers to the “retailisation” of alternative funds in EU, despite push for harmonisation

According to a recent EU study carried out by PwC, although there seems to be a trend toward the retail distribution of alternative investment funds within the EU and despite an industry push for greater harmonisation, the overall proportion of retail investors in alternative funds remains very small.

Last year, the EU Commission (DG Internal markets) selected PwC Luxembourg to carry out a detailed study of the current level of retail distribution (“retailisation”) of alternative investment funds.
The study was commissioned by the EU as part of its ongoing investigations into improving the overall efficiency of the European investment fund industry and its primary objective was to find out the extent to which key alternative, or non-UCITS, fund types are distributed to and held by retail investors. The study was then to ascertain the extent to which the number of retail investors in alternative products is influenced by regulatory or tax barriers to distribution, especially on a cross border basis.

For the purposes of the study, PwC focused on the distribution of alternative funds in nine EU jurisdictions, representing more than 70% of the EU population and 90% of the total EU non-UCITS fund market; Belgium, France, Germany, Ireland, Italy, Luxembourg, Poland, Spain and the UK.

The study revealed that overall the level of retail investors in alternative funds is very low, although there are significant variations across differents products and the jurisdictions in scope.
Looking at the different alternative funds individually shows that, on average, retail investors hold 13% of real estate funds, 10% of fund of hedge funds, 2% of private equity and venture capital funds,
1% of hedge funds. Interestingly, 58% of guaranteed (non-UCITS) funds are held by retail investors.

The study also revealed that 80% of retail investors acquired the alternative fund either directly or via an intermediary, without the use of regulatory or tax wrappers. Moreover, almost 80% of retail distribution occurs through retail banks (42%), insurance companies (22%) and IFA 1 (17%).

In contrast, the distribution channels used to attract the high net worth individual segment are very different – with 45% of all alternative fund distribution occuring via private banks; 46% via direct distribution, with fund of fund managers and others making up the rest.

The study found that each of the countries in the scope had one or more regulatory and/or tax barriers to the distribution of one or more alternative fund products in scope. In addition, all jurisdictions
had regulatory barriers towards the retail distribution of foreign funds, mostly taking the form of requiring their equivalence to similar domestic products before being allowed to publically distribute.

According to Mark Evans, Fund Distribution Leader at PwC Luxembourg, “ The majority of respondents to the study thought there was a trend toward the retailisation of alternative funds and were strongly in favour of greater EU harmonisation of this market, however, they also said that retail distribution was not a key part of their overall distribution strategy. This apparent contradiction could be explained by the appetite of retail investors for alternative investments being significantly satisfied by sophisticated UCITS products and the industry call for greater harmonisation due to their desire for increased efficiency in the cross border of alternative funds to the non-retail segment .”

The study is available on the EU Commission website http://ec.europa.eu/internal_market/investment/studies_en.htm

1 Independant Financial Adviser