Private assets: Is regulation a brake or an accelerator?
Regulation is essential in supporting the development of private assets, particularly among individual investors. But it doesn’t get everything right all of the time.
Demand for private assets is showing no sign of slowing down. According to the latest Natixis Global Fund Selectors Outlook Survey1, there’s continued positivity on private equity (55%) and private debt (57%). Of the 79% who invest in private equity, 88% plan to maintain (49%) or increase (39%) their exposure.
Meanwhile new directives like the second iteration of the European Long-Term Investment Fund (ELTIF 2.0) – a closed-end fund type in Europe that allows retail investors access to illiquid assets, which came into force earlier this year – are designed to expand the development of private markets.
“A combination of regulators and managers like ourselves have been trying to make the asset class more accessible”, said Nicole Downer, Managing Partner at private debt specialist MV Credit. “We’ve seen that in the UK, where we have the long-term asset funds, the LTAFs, which are open-ended, and aim to basically solve situations like liquidity, and complexity.
“Similarly, in Europe, ELTIF 2.0 has really helped to iron out some of the tiering points that we found with the first ELTIF. It is also proving to be a source of more demand for the asset class. We've been active in that space for a couple of years and we've seen more and more inquiry.”
However, while private asset investment will play a significant role in the transition to a more climate-friendly economy, regulation doesn’t always allow for innovation.
Take the Sustainable Finance Disclosure Regulation (SFDR). Since 2021, SFDR has required asset managers to sort their funds into different sustainability categories based on the product's characteristics: funds are categorized as articles 6, 8 or 9, with 'Article 9' funds requiring 'sustainable investment' as their explicit objective.
But SFDR has also created as many problems as it intended to solve. It’s an example of how a regulation applied to listed markets can be adapted too simplistically for the private space, without fully appreciating all the specificities.
Rob Wilkinson, CEO of real estate specialist AEW Europe, explained: “When SFDR came out, Article 9 disclosure meant that 100% of every asset had to satisfy the requirements from day one in the fund. And we're sitting here from a real estate standpoint saying, we have a big problem in GHG [greenhouse gas] and carbon emissions… and what you are stopping us from doing is effectively buying those assets that don't satisfy the requirements and enabling us to make them better.
“We spend a lot of time on [regulation], understanding it and reporting on it, and not as much time as I would like on addressing the fundamental issue itself, by which I mean investing in our assets in a way that is improving energy efficiency, reducing GHG emissions and so on.”
Nicole added: “Regulation generally is a good thing and you can see the regulators trying to address specific areas, with ESG being a really good example of that. But quite often regulation is taking a public market style and trying to fit it to what we do [in private markets].”
No one-size-fits-all
Compared to the US, there is considerable growth potential from retail investors in Europe, where the region has historically lagged behind its US counterpart. But there’s also a degree of nuance outside the US, and managers have often struggled to enforce regulation to meet specific regional differences.
Eric Deram, Managing Partner at private equity specialist Flexstone Partners, said: “We are regulated in Europe, in Switzerland, in the Cayman Islands, in Singapore, and in the US. And every single jurisdiction I guess is trying to add the special twist to things and for a firm which is 10 billion in assets under management. And that is very complicated to address.”
Nicole added: “There isn't one size fits all [in Europe], and I think that's why we see the US has gone quite a lot further in attracting retail customers. [In the US] there are products that everyone can buy into.”
Clearly, the attitudes of governments and regulators remains a crucial factor in opening private markets to retail investors. And there’s no denying what’s at stake.
As Eric put it: “Whether it's private debt, infrastructure, real estate or private equity, private assets have delivered very strong returns over the last 20 or 30 years. We see it as a very good addition to a diversified investment portfolio of any sophisticated investors, so why not any private investor too?”
This article is based on the views captured during the Thought Leadership Summit in Paris in March 2024. MV Credit, AEW, and Flexstone are all affiliates of Natixis Investment Managers, and form part of our Expert Collective.
Source: Natixis Global Fund Selector Outlook Survey 2024, https://www.im.natixis.com/intl/resources/2024-fund-selector-outlook-full-report
Marketing communication. This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article. The reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services.
Past performance is not a guarantee of future results. All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Demand for private assets is showing no sign of slowing down. According to the latest Natixis Global Fund Selectors Outlook Survey1, there’s continued positivity on private equity (55%) and private debt (57%). Of the 79% who invest in private equity, 88% plan to maintain (49%) or increase (39%) their exposure.
Meanwhile new directives like the second iteration of the European Long-Term Investment Fund (ELTIF 2.0) – a closed-end fund type in Europe that allows retail investors access to illiquid assets, which came into force earlier this year – are designed to expand the development of private markets.
“A combination of regulators and managers like ourselves have been trying to make the asset class more accessible”, said Nicole Downer, Managing Partner at private debt specialist MV Credit. “We’ve seen that in the UK, where we have the long-term asset funds, the LTAFs, which are open-ended, and aim to basically solve situations like liquidity, and complexity.
“Similarly, in Europe, ELTIF 2.0 has really helped to iron out some of the tiering points that we found with the first ELTIF. It is also proving to be a source of more demand for the asset class. We've been active in that space for a couple of years and we've seen more and more inquiry.”
However, while private asset investment will play a significant role in the transition to a more climate-friendly economy, regulation doesn’t always allow for innovation.
Take the Sustainable Finance Disclosure Regulation (SFDR). Since 2021, SFDR has required asset managers to sort their funds into different sustainability categories based on the product's characteristics: funds are categorized as articles 6, 8 or 9, with 'Article 9' funds requiring 'sustainable investment' as their explicit objective.
But SFDR has also created as many problems as it intended to solve. It’s an example of how a regulation applied to listed markets can be adapted too simplistically for the private space, without fully appreciating all the specificities.
Rob Wilkinson, CEO of real estate specialist AEW Europe, explained: “When SFDR came out, Article 9 disclosure meant that 100% of every asset had to satisfy the requirements from day one in the fund. And we're sitting here from a real estate standpoint saying, we have a big problem in GHG [greenhouse gas] and carbon emissions… and what you are stopping us from doing is effectively buying those assets that don't satisfy the requirements and enabling us to make them better.
“We spend a lot of time on [regulation], understanding it and reporting on it, and not as much time as I would like on addressing the fundamental issue itself, by which I mean investing in our assets in a way that is improving energy efficiency, reducing GHG emissions and so on.”
Nicole added: “Regulation generally is a good thing and you can see the regulators trying to address specific areas, with ESG being a really good example of that. But quite often regulation is taking a public market style and trying to fit it to what we do [in private markets].”
No one-size-fits-all
Compared to the US, there is considerable growth potential from retail investors in Europe, where the region has historically lagged behind its US counterpart. But there’s also a degree of nuance outside the US, and managers have often struggled to enforce regulation to meet specific regional differences.
Eric Deram, Managing Partner at private equity specialist Flexstone Partners, said: “We are regulated in Europe, in Switzerland, in the Cayman Islands, in Singapore, and in the US. And every single jurisdiction I guess is trying to add the special twist to things and for a firm which is 10 billion in assets under management. And that is very complicated to address.”
Nicole added: “There isn't one size fits all [in Europe], and I think that's why we see the US has gone quite a lot further in attracting retail customers. [In the US] there are products that everyone can buy into.”
Clearly, the attitudes of governments and regulators remains a crucial factor in opening private markets to retail investors. And there’s no denying what’s at stake.
As Eric put it: “Whether it's private debt, infrastructure, real estate or private equity, private assets have delivered very strong returns over the last 20 or 30 years. We see it as a very good addition to a diversified investment portfolio of any sophisticated investors, so why not any private investor too?”
This article is based on the views captured during the Thought Leadership Summit in Paris in March 2024. MV Credit, AEW, and Flexstone are all affiliates of Natixis Investment Managers, and form part of our Expert Collective.
Marketing communication. This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article. The reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services.
Past performance is not a guarantee of future results. All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
DR-63511
All back to bonds?
2024 Private Assets Report
Investment Outlook: Loomis Sayles
