In the wake of the 2008 global financial crisis, the EU legislature adopted the Alternative Investment Fund Managers Directive (Directive 2011/61/EU or AIFMD) in order to harmonise the marketing of alternative investment funds to professional investors in the EU. The so-called passporting regime introduced by AIFMD allows alternative investment fund managers (AIFMs) to gain harmonised access to professional investors throughout the EU.

The European legislature subsequently adopted a regulation on European venture capital funds (Regulation (EU) No 345/2013 or the “EuVECA Regulation”) and a regulation on European long-term investment funds (Regulation (No) 2015/60 or the “ELTIF Regulation”), thereby indirectly recognising the added value for retail investors of investing in traditional private equity. For various reasons, however, such as a strict regulatory framework, the ELTIF has yet to achieve the expected level of success. The Commission’s current proposal, amending inter alia the scope of eligible assets, portfolio composition, diversification requirements and borrowing limits for ELTIFs, is intended to facilitate the flow of funds into the real economy, including from retail investors.

Indeed, according to the Commission’s Action Plan on Sustainable Finance, aimed at inter alia reorienting capital flows towards sustainable investment, capital held by retail investors can make a significant contribution to achieving sustainable and inclusive growth, redressing economic disparities, and accelerating the transition to a more sustainable economy.

However, when seeking retail investors to participate in AIFs, AIFMs face certain obvious barriers – illiquidity, high investment thresholds, unscheduled capital calls that must be satisfied at relatively short notice, and the long-term nature of the investment. In order to be able to attract retail investors, these obstacles need to be addressed. In this regard, there are various possible solutions. One of the most obvious is the creation of a feeder fund, to pool funds from retail investors in a separate vehicle. The feeder fund then invests in the master fund, together with institutional and professional investors. This type of vehicle can better meet the needs of retail investors in terms of liquidity. For example, additional liquidity in the feeder fund can be achieved by providing for enhanced redemption options or facilitating secondary transfers amongst retail investors. In addition, it should be noted that recent technological developments in the fund industry may help managers more efficiently manage a large group of investors and keep administrative costs down.

The time is ripe to expand the investor base of alternative investment funds, traditionally limited to institutional and professional investors, to include retail investors. By facilitating investment in private equity and contributing to the real economy, such an expansion would be beneficial to retail investors seeking enhanced returns, fund managers and the overall investment climate.

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