Horizon Scan for Private Investment Funds

Sustainable finance rules and initiatives continue to evolve. Key developments include:

• new reporting requirements and standards, such as under the EU’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB)’s climate-related disclosure standards;
• marketing rules, especially for those firms that are in scope of the EU’s Sustainable Finance Disclosure Regulation (SFDR) and who can also use a sustainability label under the UK’s recently-finalised sustainability disclosure requirements (SDR); and
• further detail on regulatory expectations on greenwashing, including requirements on firms to have governance procedures and policies that include robust, verifiable, and consistent sustainability statements.

Although conventional funds rather than European Long-Term Investment Funds (ELTIF) are likely to remain the vehicles of choice for professional investors, the ELTIF may be an appealing option for managers targeting local government pension schemes, HNWIs, affluent retail markets, charities, in addition to the usual professional investors. The fact that the ELTIF marketing passport covers retail investors is a boost. We would expect the ELTIF authorisations to start climbing above the 100 to date now that the revised ‘ELTIF II’ framework is in effect.

As the EU Retail Investment Strategy demonstrates, adequate protection of those retail investors participating in EU capital markets protection remains a regulatory priority.

In the UK, there are more initiatives aimed at promoting the competitiveness of the private funds market with the Long Term Asset Fund (LTAF)

We expect to hear shortly on the UK’s Financial Conduct Authority (FCA)’s intentions on any re-evaluation of the UK AIFM Regulation following the EU’s review of the Alternative Investment Fund Managers Directive (AIFMD)

The LTAF has broader investment and structuring parameters than the EU ELTIF, but, being a UK fund vehicle, it does not benefit from the EU AIFMD marketing passport.

Although a UK manager seeking to target the retail market via the LTAF would need to accept increased compliance and regulatory risk along with FCA permission to manage an authorised AIF, there have been several recent developments designed to reduce investment barriers to help drive Defined Contribution pension investment in long-term illiquid investments such as private equity, venture capital, infrastructure and real estate – with the LTAF in mind. For instance, the Mansion House Compact, removal of carried interest from the cost cap and consolidation of DC funds.