The Association of Investment Companies (AIC) has called on the EU to make investment companies a key part of its plans to deliver Capital Markets Union and to create a more balanced funds market in the EU.
The EU is considering what can be done to make capital markets better at raising funds for long-term investment, how to reduce businesses' reliance on bank debt and how to support investment in SMEs and infrastructure.
The AIC has highlighted key reasons why investment companies could be invaluable in this project:
• Investment companies are suited to investment in SMEs and infrastructure as they do not have to sell assets to meet redemptions, which can be difficult when portfolios are invested in illiquid assets. Instead of redeeming their shares via the manager, investors trade their shares on the stock market;
• As there is no need to hold cash to meet redemptions, investment companies can provide more effective capital allocation, meaning that more of the funds raised are invested in the target asset class;
• Due to their closed-ended structure and independent board, investment companies reduce some of the systemic risks that the IMF considers arise when investments are made through open-ended funds; and
• Investment companies are able to raise finance from a wide range of sources, both institutional and retail, which could increase the amount of capital available for investment.
Guy Rainbird, Public Affairs Director, Association of Investment Companies (AIC) said:
"The investment company structure is the ideal way to pool capital for investment in a wide range of asset classes, including unquoted SMEs and infrastructure projects. The sector's well-established track record demonstrates that investment companies can be a compelling option for investors.
"The IMF has warned that open-ended funds create risks of 'herding' and excessive risk taking, particularly where investors cannot observe or oversee the portfolio manager. These concerns are addressed in investment companies by the independent board of directors who oversee the manager on behalf of the shareholders.
"Developing a more balanced funds market, with a regulatory and commercial environment that encourages the launch of investment companies across the EU, would be a major help in achieving the objectives of Capital Markets Union."