Loan Funds in Europe: UCITS and AIFMD in 2012
By CHRISTIAN PARKER, JONATHAN SHENKMAN & KARINA BIELKOWICZ
The European loan fund has always been the poor relation by comparison with more traditional bond and share funds and that disparity is likely to get worse as the AIFM Directive comes into force across Europe. It is embedded in the way that the UCITS Directive has made it possible for the retail market to be accessible directly to funds that are invested in credit investments that are similar to loans (high yield bonds and asset backed securities) and indirectly to hedge fund and other alternative strategies (commodities) that are only available through the use of derivatives (the Newcits phenomenon).
Historically, commercial lending was the preserve of the banks but that began to change quite significantly in the late 90s and accelerated in the 00s, driven to a significant degree by the rise of the CLO and simultaneously, but to a lesser degree, by the rise of the loan fund. Banks, damaged by the Lehman crisis and now further at risk by virtue of the sovereign crisis, do not appear to be that well-placed to ramp up their lending. New regulation has made the issuance of (tranched) CLOs difficult and the AIFM Directive is likely to significantly raise the costs of loan funds that are set up by way of European specialist funds (whether Luxembourg SIFs, Irish QIFs, UK QISs or any other fund platform that will be caught in the AIFM Directives web) or in fact any fund sold in Europe. Not that one should necessarily expect a reasoned approach from a politician or regulator, but it is worth noting that the added difficulties and costs associated with European loan funds come at a time when industry (and politicians) are crying out for loans. Notwithstanding this paradox, the political/regulatory environment for non-bank lending is likely to get worse as the regulators ramp up their analysis of how to regulate the pejoritatively titled shadow banking system.