Spain: a frontrunner in using harmonised EU alternative investment funds
July 2019 | EXPERT BRIEFING | FINANCE & INVESTMENT
The Spanish alternative investment sector has experienced significant growth recently, as signalled by the increasing number of management companies and funds operating in the country.
This growth has drawn the attention of private banking clients interested in these kinds of funds, particularly in light of the current volatility seen in the financial markets. To cope with this growing demand, the Spanish regulatory framework has provided some efficient vehicles in terms of governance, investment policy and taxation.
One of them is the Spanish private equity entity – entidad de capital riesgo (ECR). ECRs can take the form of companies (SCRs) or mutual funds (FCRs), and they are relatively flexible in terms of governance, particularly FCRs. Their incorporation is not subject to authorisation from the Spanish supervisory authority, the Comisión Nacional del Mercado de Valores (CNMV), but merely requires registration. ECRs can also be offered to non-professional investors, in terms of MiFID II, if they commit to invest at least €100,000 and declare that they are aware of the risks of investing in such a vehicle.
ECRs are also efficient in terms of costs, as Spanish management companies assume the manager and registrar agent roles, while a depositary is only required when dealing with non-professional investors or exceeding the assets under management (AUM) thresholds under the Alternative Investment Fund Managers Directive (AIFMD). ECRs are also efficient in terms of taxation, as, for example capital gains can be exempted up to 99 percent.
In the context of real estate funds, there are also interesting vehicles, including the sociedad anónima cotizada de inversión en el mercado inmobiliario (SOCIMI), which are Spanish real estate investment trusts (REITs), which are focused on investing in urban real estate assets for lease, in other SOCIMIs or foreign REITs. SOCIMIs do not qualify as alternative investment funds (AIFs), so they are not required to appoint a management company (AIFM) and a depositary. They can be marketed to non-professional investors, e.g., through private placement exemptions (those of the European Union (EUs) Prospectus Directive). SOCIMIs are also subject to a special tax regime, with a 0 percent corporate income tax rate.
However, Spanish vehicles are not satisfactory for other investment strategies, such as venture capital and direct lending, for which EU harmonised funds are more attractive for Spanish managers, in particular European venture capital funds (EuVECAs) and European long-term investment funds (ELTIFs), respectively.
Theoretically, ECRs can also be used for venture capital strategies. In fact, there is a specific ECR sub-category for venture capital, the ‘ECR-Pyme’ – Pyme is Spanish for small and medium-sized enterprise – which was included in the Spanish regulation for channelling venture capital investments. However, neither vehicle has been particularly successful in the venture capital space.
The reason ECRs are not particularly attractive is the advantages offered by EuVECAs over local Spanish vehicles. EuVECAs are also flexible in terms of governance and investment policy. Unlike ECRs they are not subject to diversification limits. Their incorporation does not require authorisation either.
Like ECRs, EuVECAs can be marketed to both professional and non-professional investors. However, their main advantage is that, unlike other AIFs, they can be marketed to non-professional investors across the EU under the EuVECA Regulation.
Additionally, management companies of EuVECAs are subject to fewer requirements in terms of their own resources and internal organisation. For example, their minimum share capital is only €50,000 – or €60,000 in Spain, as this is the minimum share capital for public liability companies, in contrast to the capital required of other Spanish AIFMs at €125,000. Own funds of EuVECA management companies must be at least 12.5 percent of their fixed overheads, in contrast with the 25 percent required of other AIFMs. In addition, they are not required to appoint a depositary and they are subject to the same taxation as ECRs.
Regarding direct lending vehicles, Spanish regulations provide a couple of alternatives. First, there are entidades de inversión colectiva de tipo cerrado (EICC), which are closed-ended AIFs without limitation with regard to their investment policy. However, EICCs can only be marketed to professional investors, which makes marketing them in private banking networks difficult. Additionally, EICCs do not have a special tax regime and are subject to the ordinary 25 percent corporate income tax rate.
Another alternative is fondos de inversión libre (FILs). FILs are AIFs that can purchase and grant loans and credit facilities without using leverage. They have a hybrid nature in that they are open-ended vehicles that may have a lock-up period, the same required for complete divestments. However, these FILs cannot be marketed to retail investors and must have at least 25 investors.
In this regulatory context, Spanish managers of direct lending funds have found in ELTIFs an interesting alternative for structuring their funds. Like EuVECAs, ELTIFs are also harmonised funds that can invest in equity, quasi-equity and debt instruments of companies, grant loans and even invest in real estate assets, provided they give rise to economic or social benefits and contribute to smart, sustainable and inclusive growth, such as investment projects in education, health, transport and communication. ELTIFs are usually closed-ended vehicles, but they may also be subject to a redemption policy. They must appoint an AIFM (or be self-managed) and a depositary. Their incorporation is subject to prior authorisation from their home supervisor.
One of the most relevant attributes of ELTIFs is that they can be marketed to retail investors, not only in Spain but in any EU Member State. Marketing ELTIFs to retail investors, however, is subject to certain requirements. For example, the ELTIF manager or distributor must provide appropriate investment advice to retail investors. Also, if a retail investors’ financial instrument portfolio does not exceed €500,000, the ELTIF manager or distributor must ensure that retail investors do not invest more than 10 percent of their portfolio in ELTIFs, and that the initial minimum amount invested in one or more ELTIFs is €10,000. Furthermore, retail investors are entitled, during the subscription period and at least two weeks after the date they subscribe the shares of the ELTIF, to cancel their subscription and have their money returned without penalty.
Spanish managers have incorporated ELTIFs in Spain, particularly in Biscay where there is a special tax regime (with 1 percent rate in the corporate income tax), if ELTIFs comply with certain investment requirements, and in Luxembourg, through reserved alternative investment funds (RAIFs) qualifying as ELTIFs, either as funds on a standalone basis, or as sub-funds in the case of an umbrella fund.
Miguel Sánchez Monjo is a senior associate at Cuatrecasas. He can be contacted on +34 915 247 953 or by email: firstname.lastname@example.org.
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Miguel Sánchez Monjo