Funds Focus | August 2020

Written on 4 Aug 2020

Welcome to the latest edition of our Funds Focus.

The onset of Covid-19 has had a significant impact of many different aspects of asset management. With growing scrutiny on liquidity management, regulators and other supervisory authorities across Europe want to know how fund managers have responded to liquidity issues, and are calling for a greater level of reporting. From a UK perspective, focus is shifting to long-term investor interests as the Financial Conduct Authority plans to consult on ways to ensure that redemption arrangements offer a fair deal to those remaining in the fund. In this edition, we also consider the extent to which tail funds might offer fund managers a way out of the malaise of the pandemic.

The FCA has praised the financial sector's performance during the crisis, and there are now signs that regulatory focus is beginning to transition from the immediate response towards a focus on the pandemic's longer-term impacts. While there have not been many LP default situations during the Covid-19 crisis so far, managers should be aware of the issues raised by LP defaults. Take a look at our six practical tips to help prepare in case this difficult situation occurs.

As the industry engages increasingly with sustainable investing, we have seen a whole raft of draft European legislation aimed at directing finance towards economic activities that have genuine long-term benefits for society. But can the current momentum behind sustainable finance mark a permanent change in investment practices and behaviours? And what will be the "Brexit effect"?

Finally, the Institutional Limited Partners Association's new guidance on enhancing transparency around subscription lines of credit marks a step-up in the level of disclosure expected from investment funds. In this edition we consider whether these guidelines are likely to gain traction in the industry.

If you would like to discuss any of the topics we have covered, please contact one of the experts listed below.

Choosing the right tool for the job: regulators focus on liquidity management

The onset of Covid-19 has led to re-evaluations of best practice in many aspects of asset management. From a European regulator perspective, one concern that has emerged is liquidity management. Fund managers are under renewed scrutiny over their management of liquidity. In recent months, we have seen recommendations from the European Systemic Risk Board; national regulators requesting further information; and the Financial Conduct Authority directing its focus on long-term investor interests.

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Hold the tiger by the tail: the challenges of end of life funds

Managers of private alternative funds, such as real estate, private equity, infrastructure and debt funds, that are approaching the end of their life are now faced with the inevitable "what next?" question. Plans to sell the few remaining assets, liquidate the fund and reap the benefits of the carried interest arrangements have been put on hold as Covid-19 stifles transactional activity, depresses market values and slows down the raising of the next generation of funds.

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Regulator issues reminder of conduct of business obligations when dealing with retail investors

The European Securities and Markets Authority has published a statement in response to an increase in retail investor activity amid the exceptional financial market conditions brought about by the Covid-19 pandemic. The statement, published on 6 May, reminds investment firms, including UCITS (undertakings for collective investment in transferable securities) and AIFs (alternative investment funds) management companies when they provide investment services, of their conduct of business obligations under The Markets in Financial Instruments Directive II.

In this Insight we look at what firms need to do to ensure that they continue to meet their regulatory obligations to clients in these more volatile market conditions.

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Financial Conduct Authority encouraged by Covid-19 response and sector resilience

The UK regulator has stressed the importance of contingency planning for the industry, including wealth managers and advisors, and hints that more outcome-based regulation lies ahead

The wealth management and advisory sector responded well to the onset of the Covid-19 crisis, according to Megan Butler, executive director of supervision (investment, wholesale and specialists) for the Financial Conduct Authority. In a speech on 4 June 2020 to The Personal Investment Management and Financial Advice Association's Virtual Festival, Butler told the PIMFA audience: "In operational terms, this industry has responded well." The FCA's praise of the sector's performance during the pandemic came alongside a detailed self-assessment of the UK financial regulator's own response to the crisis and an outline of its priorities and areas of focus.

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Six tips to navigate LP defaults

Limited partner defaults tend to become a focus of attention and discussion during periods of market dislocation. Economic pressures may mean that investors are unable or unwilling to fund their drawdown obligations, although, even in a downturn, this is rare. There have not been many LP default situations during the Covid-19 crisis so far, and, perhaps, few may transpire. Nonetheless, managers should be aware of the issues raised by LP defaults – here are six practical tips to help prepare in case this difficult situation occurs.

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New European rules underline the fund industry's desire for sustainable investment

Financiers and regulators are taking big steps in the development of responsible investment as a mainstream feature of the funds industry with lessons from the pandemic offering renewed impetus. As the industry engages increasingly with sustainable investing, much of the development in Europe is aimed at AIFs (alternative investment funds) and UCITS (undertakings for collective investment in transferable securities). But can the current momentum behind sustainable finance mark a permanent change in investment practices and behaviours?

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New ILPA guidance enhances transparency around subscription lines

Last month, the Institutional Limited Partners Association released new guidance, entitled "Enhancing Transparency Around Subscription Lines of Credit". The guidance follows on from and should be read in conjunction with ILPA's 2017 guidance, which called for greater clarity and transparency for limited partners around the use of subscription lines of credit by general partners.

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