Retailisation of non-harmonised funds EU Commission Study EDHEC Alternative Investment Days 2008 9-10
Contents I. Context II. Key Highlights III. Conclusions
I. Context 1. Background to the study 2. Objectives / Methodology
I. Context 1. Background to the study 2008 Study on the retailisation of non-harmonised investment products 2007 2006 Study on investment funds in the EU: comparative analysis of use of investment powers, outcomes and related risk features in both UCITS non-harmonised markets Expert Group on OEREF Expert Group on Alternative Investment Funds White paper on Asset Management and Slide 4
I. Context 2. Objectives Quantitative analysis of current distribution patterns to retail segment Analyzing key drivers for trends in alternative fund distribution Identifying future developments of non-harmonised funds retailisation based on trends, drivers and barriers Assist Commission to determine if harmonisation is needed Slide 5
I. Context 2. Methodology used 1 Description of nonharmonised fund markets & products 2 Analysis of tax & regulatory frameworks SP IE GB F B L D I PL 3 Market survey: Extent of retail exposure & distribution channels used 4 Conclusions & trends Slide 6
1. Markets in scope, products, AuM, participants profile 2. Distribution channels available 3. Investor type 4. Barriers / Accessibility to retail distribution (All sales & AuM data as at Dec 2007)
1. Markets & products 9 EU markets in scope Represent 90% of non-ucits assets 7,833 funds +50 different legal structures SP IE GB F B L D I PL Slide 8
1. AuM of all investment funds (markets in scope) UCITS 74% Non-UCITS 26% Non-UCITS (markets in scope) Euro 1.79 tn Source: Survey Slide 9
1. AuM of non-ucits funds (markets in scope) Other non-ucits funds 16% UCITS 74% NON-UCITS 26% PE/VC funds 4% HF and FoHF 3% RE funds 3% Source: Survey Slide 10
1. AuM of all investment funds 2,500,000 2,000,000 UCITS Non-UCITS In EUR m 1,500,000 1,000,000 500,000 0 Germany Luxembourg Source: Survey Ireland UK France Italy Spain Poland Belgium Slide 11
1. Split of AuM across alternative products In EUR m 900,000 800,000 700,000 600,000 RE HF/FoHF PE/VC Other non-ucits funds no split available 500,000 400,000 300,000 200,000 100,000 0 Germany Luxembourg Source: Survey Ireland UK France Italy Spain Poland Belgium Slide 12
1. Survey participants Fund Managers Distributors 70% 70% 60% 60% 50% 50% 40% 40% 30% 63 30% 66 20% 10% 0% 40 21 20 HF and FoHF RE PE/VC funds Other non- UCITS funds 11 Guaranteed funds 8 Other structured funds 20% 10% 0% 44 34 24 HF and FoHF RE PE/VC funds Other non- UCITS funds 18 Guaranteed funds 14 Other structured funds Source: Survey Slide 13
2. Distribution channels Non-UCITS Sales Distribution Final investor funds regime channels base split NON-UCITS Real estate funds Hedge funds Private equity / venture capital funds Guaranteed funds Other structured funds Public Offering Private Placement Institutional clients Investment bank Insurance company Other fund manager Private bank Retail bank Fund platform IFA Distributors/ Intermediaries Distribution without wrapper Distribution without wrapper and through an intermediary FoF Personal tax wrapper Pension products Discretionary/ Managed account Certificate Insurance contracts Distribution through listing Distribution through wrappers A A B C Individual investors HNWI Mass Affluent Retail Source: Survey Institutionals investing for their own account (out of scope) Institutional investors Slide 14
2. Distribution channels available Distribution without wrapper A 80% of sales to individual investors 99% of above sales via pure intermediaries - retail banks - IFAs - fund platforms Source: Survey Slide 15
2. Distribution channels available Distribution with wrapper B Almost 20% of sales to individual investors Main wrapper intermediaries are insurance companies, private banks FoF managers and Source: Survey Slide 16
2. Distribution channels available Distribution through listing C Not a significant distribution channel for non-ucits funds Most active Stock Exchanges are: - London Stock Exchange (47% of the non-ucits fund market capitalization in our sample) - Deutsche Börse (27%) - Borsa Italiana (13%) - NYSE Euronext (12%) RE funds account for approximately 50% of the total market of listed non-ucits funds capitalization Source: Survey Slide 17
2. Distribution channels used to target individual investors (% of net sales) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9 10 4 5 3 46 6 16 5 10 2 21 42 25 5 4 18 4 11 8 HNWI Mass Affluent Retail 17 5 22 2 Source: Survey Direct distribution Stock exchange Retail bank Private bank Investment bank Insurance company Fund platform/supermarkets IFA Fund of fund manager Slide 18
3. Investor type in PE/VC funds 100% PE/VC funds 85 75% 50% 25% 0% 2 Retail investors 3 6 4 Mass Affluent HNWI Ins titutional investing for their own account Ask m y Interm ediary Source: Survey Slide 19
3. Investor type in Hedge Funds and FoHF Hedge Funds FoHF 100% 100% 75% 75% 67 50% 49 42 50% 25% 0% 1 3 5 Retail Mass Affluent HNWI Institutional Ask my investors investing for Intermediary their own account 25% 0% 10 7 15 Retail Mass Affluent HNWI Institutional Ask my investors investing for Intermediary their own account 1 Source: Survey Slide 20
3. Investor type in Real Estate funds Real Estate funds 100% 75% 63 50% 25% 13 7 4 13 0% Retail investors Mass Affluent HNWI Institutional investing for their ow n account Ask my Intermediary Slide 21
3. Investor type in Guaranteed funds 100% Guaranteed funds 75% 50% 58 25% 14 6 14 8 0% Retail investors Mass Affluent HNWI Institutional investing for their ow n account Ask my Intermediary Source: Survey Slide 22
3. Summary: % of retail investors in each product 100% 75% 50% 58 25% 0% Guaranteed funds 13 10 2 1 RE FoHF PE/VC HF Source: Survey Slide 23
4. Barriers to retail distribution Lack of regulatory regime / structure some products/countries Complete prohibition of some products High minimum initial subscription amounts No reciprocal distribution arrangements Foreign funds need to be authorised Equivalence requirements Some additional regulatory requirements on foreign funds Some tax barriers against foreign funds Wrappers provide an ability to overcome some of these barriers Slide 24
4. Barriers to retail distribution Summary: regulatory barriers reflect issues of investor protection Regulatory equivalence is critical for X-border funds Regulatory equivalence to ensure no regulatory arbitrage Regulators viewed requirements on foreign funds as reasonable Difficult to determine material impact of tax barriers: many variables Cross border retail distribution of non-harmonised funds very low Strong correlation between extent of barriers & extent of retail investors Slide 25
4. Accessibility to retail (public) distribution B F D IE I L PL SP GB PE/VC HF FoHF RE % retail 2 1 10 13 Source: Survey Slide 26
III. Conclusions 1. Apparent contradictions 2. Key take aways
III. Conclusions 1. Apparent contradictions Survey question: Is retailisation of non-ucits a real trend and if so, is it primarily driven by demand or supply? Source: Survey Slide 28
III. Conclusions 1. Apparent contradictions Is retailisation of non-ucits a real trend and if so, is it primarily driven by demand or supply? 100% 80% 32 39 47 22 44 60% No Yes 40% 20% 68 61 53 78 56 0% RE HF PE/VC Guaranteed funds Other non- UCITS funds Source: Survey Slide 29
III. Conclusions 1. Apparent contradictions Is retailisation of non-ucits a real trend and if so, is it primarily driven by demand or supply? So - a majority observed a real 100% trend towards retailisation of alternative funds 80% 32 39 47 22 44 notwithstanding very limited retail exposure across all products 60% 40% 20% 68 61 53 78 56 No Yes 0% RE HF PE/VC Guaranteed funds Other non- UCITS funds Source: Survey Slide 30
III. Conclusions 1. Apparent contradictions Survey question Is the distribution of non-ucits funds to retail investors one of your strategic objectives? Source: Survey Slide 31
III. Conclusions 1. Apparent contradictions Is the distribution of non-ucits funds to retail investors one of your strategic objectives? 100% 80% 62 29 55 60% 40% 80 89 71 NO YES 20% 0% 38 20 11 RE HF PE/VC Guaranteed funds Other non-ucits funds 45 Source: Survey Slide 32
III. Conclusions 1. Apparent contradictions Is the distribution of non-ucits funds to retail investors one of your strategic objectives? 100% Except for guaranteed funds a majority did NOT see retail distribution as a strategic objective 80% 60% 40% 62 80 89 29 71 55 NO YES 20% 0% 38 20 11 RE HF PE/VC Guaranteed funds Other non-ucits funds 45 Source: Survey Slide 33
III. Conclusions 1. Apparent contradictions Survey question Is a harmonised regulatory framework for the retail distribution of non-ucits needed? Source: Survey Slide 34
III. Conclusions 1. Apparent contradictions Is a harmonised regulatory framework for the retail distribution of non-ucits needed? 100% 30 29 25 23 22 33 75% 11 13 31 31 22 No opinion No Yes 50% 25% 59 58 44 46 56 67 0% Real estate funds Hedge Funds P E/VC funds Guaranteed funds Other non-ucits funds Source: Survey Do not manage or distribute non-ucits funds Slide 35
III. Conclusions 1. Apparent contradictions Retail distribution of non-ucits is NOT a strategic business objective but majority still favour a harmonised market - why? Source: Survey Slide 36
III. Conclusions 2. Key conclusions Significant market fragmentation exists number of legal structures, product preferences, regulatory & tax frameworks In all jurisdictions and for many products - regulatory barriers to retail distribution exist, especially for X- border retail distribution Strong correlation (across jurisdictions & products) between extent of barriers and level of retail distribution Survey viewed a trend towards retail distribution although level of retail investors do not support this impact of barriers Retail investors partly satisfied through sophisticated UCITS Retail distribution not a strategic business objective but most wanted harmonisation probably to enable cross border distribution of other investor groups No consensus on how to achieve greater harmonisation Slide 37
Mark Evans Partner, Investment Management Luxembourg mark.evans@lu.pwc.com 2008. All rights reserved. refers to the network of member firms of International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of.