Horizon Scan for Private Investment Funds - Autumn 2024

Those who have had to navigate and consider the EU’s Sustainable Finance Disclosure Regulation (SFDR) have faced its challenges and noted its deficiencies. Specifically, these have included data gaps, the SFDR’s failure to accommodate transition assets, and the market’s approach to treat it as a labelling rather than a disclosure framework. The European Commission is due to determine next steps for SFDR II (if any) in mid-2025. In the meantime, the mood music from ESMA and others is to shift SFDR to a strict labelling regime with clear eligibility requirements, minimum criteria, tiered disclosure requirements, and naming and marketing restrictions. This would provide welcome clarity to retail investors in particular and also support investors’ ‘sustainability preferences’ and product governance under MiFID II. Alongside this is the embedding of the EU Taxonomy as a common reference point for the assessment of sustainability, which seems sensible given that the EU Taxonomy is a key feature of EU sustainability reporting requirements that will begin to apply from mid-2027. These significant changes would create a simpler but more consistent framework and address some of the shortcomings, such as the breadth of products that currently disclose under Article 8 SFDR and the lack of recognition of transition strategies.

Asymmetry between the rules in different jurisdictions continues to add further complexity to compliance. For instance, funds disclosing under Article 8 or 9 of SFDR may not meet certain FCA criteria under the Sustainability Disclosure Requirements (SDR) when the regime is extended to overseas funds marketing in the UK. This is compounded by differing requirements on fund names using sustainability-related terms. In particular, the SDR restrictions will apply from 2 December 2024 only to those marketing to retail investors, whereas the ESMA guidelines in the EU apply (for new funds from 21 November 2024) across the board to institutional investor-only funds as well as those marketing to retail investors, and even if the fund is no longer marketing at all.

The ongoing stay of the US SEC climate disclosure rules pending judicial review also creates some uncertainty regarding future mandatory compliance dates and which requirements, if any, will survive the various court challenges. Certain companies may be subject to similar requirements anyway, either because they are also subject to US state legislation (e.g., California SB 261 and SB 253) or non-US regulations, or because their investors and other important stakeholders are asking for the same information.

We see the continued ‘democratisation’ of private capital across all asset classes, with managers seeking broader non-institutional investment opportunities and the use of regulated vehicles. Managers have to accept that with this comes increased compliance, detailed authorisation requirements, and regulatory risk. To date, 7 umbrella UK Long Term Asset Funds (LTAF) have been launched by  a small handful of fund sponsor houses, including one in private debt and a small number with private equity investment strategies. Included in the 139 European Long-Term Investment Funds (ELTIF) launched to date are some with professional-only investors with private credit strategies, in part due to the fact that there can be downstream investment-related benefits to the ELTIF in certain jurisdictions (such as France). However, when member states implement AIFMD2 (which includes a new regulatory regime for funds that originate loans, including those with debt strategies) by April 2026, we would expect that the use of ELTIFs in these scenarios is no longer needed and for ELTIFs to be used principally to allow access by retail investors using the AIFMD marketing passport. The proposed changes under Solvency II (likely to be applied by member states from 2026) resulting in ELTIFs and other low-risk AIFs benefitting from a reduced solvency capital requirement of 22% (and removing the requirement to look through to the assets at portfolio level) will no doubt encourage insurance companies in the EU in this space.

Alongside this, we continue to see interest in the Luxembourg UCI part II (of which there are 249 to date). A Part II UCI (that is not also an ELTIF) can be marketed to professional investors in the EEA under the AIFMD passport and can be offered to retail investors in Luxembourg. It should be noted, however, that a number of EU jurisdictions allow Part II UCIs to be marketed to their retail investors under applicable private placement regimes.

Further ‘retailisation’ of investments is likely to be seen in the UK following the replacement of the EU-inherited UK PRIIPs regime with the new framework for 'Consumer Composite Investments’ that is expected to take effect in H1 2025, subject to Parliamentary approval and a further FCA consultation paper.

However, as an interim measure prior to the new UK regime coming into force, the UK Government has published a draft version of the Packaged Retail and Insurance-based Investment Products (Retail Disclosure) (Amendment) Regulations 2024 (PRIIPs), which aim to exempt listed investment trusts from the current PRIIPs Regulation, as well as make other necessary amendments to other EU-assimilated law. Alongside this, the FCA issued a statement on forbearance in relation to investment trust disclosure requirements stating that from 19 September 2024, the FCA will not take supervisory or enforcement action if a closed-ended investment fund whose ordinary shares (of each class if there is more than one) are admitted to trading on a UK regulated market or a UK multilateral trading facility chooses not to follow the requirements of UK PRIIPs and/or the requirements of Article 50(2)(b) and Article 51 of the MiFID Org Regulation.

Following the European Parliament elections in early June, the European Commission’s President, Ursula von der Leyen, has set a direction focussing on competitiveness (funding the digital and sustainable transition) and investment in clean and strategic technologies, amongst other items such as unlocking private sector finance to support innovation and housing and social fairness. Tackling greenwashing and promoting transparency remains a key priority for the European regulatory authorities, as confirmed in 2025 annual working programmes.

Attention has shifted to a landmark report on European competitiveness by Mario Draghi, former president of the European Central Bank. Two key themes stand out for private funds. First, Draghi criticizes the EU’s sustainability reporting and due diligence framework, calling it a major regulatory burden due to complex rules and lack of guidance. This highlights the risks of overcompliance and overreporting, especially for unlisted SMEs, in relation to the Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive. Draghi advocates for more proportionate measures and a more innovation-friendly regulatory framework. How the European Commission interprets and acts on this, alongside Draghi’s support for decarbonisation and the green transition, will be interesting to watch.

Second, in the context of unlocking private capital and building on the Economic Governance and EMU Scrutiny Unit’s March 2024: Capital Markets Union (CMU): Ten Years Later, which sets out a revival of the CMU vison, Draghi says: “The European Securities and Markets Authority (ESMA) should transition from a body that coordinates national regulators into the single common regulator for all EU securities markets, similar to the US SEC.” This would mean a move toward more centralised European regulatory supervision and therefore away from the current dynamic approaches that can be taken by different national member state regulators. It is not the first time that this has been suggested, and there is a chance that it continues to remain on the wish list for the foreseeable future.