Opening Italian alternative funds to retail clients’ investments

Investment regulations are constantly evolving, generating innovation and new solutions for investors. We talked about it with Giovanni Carotenuto from Carotenuto Studio Legale, an independent law firm with an international vocation.

On 15th March 2022, the Decree of the Minister of Economy and Finance no. 19 of 13th January 2022 (the “Decree”) was published in the Official Gazette, which amending the Ministerial Decree no. 30 of 5th March 2015 in order to redefine the conditions for participation in Italian alternative investment funds (“AIFs”) by retail clients, holding medium/large assets. The Decree will come into force on 30 March 2022.

What is an undertaking in a collective investment scheme and which are its main features?                             

Pursuant to Article 1, paragraph 1, sub-paragraph k), of the Legislative Decree no. 58 of 24th February 1998 (the Consolidated Law on Finance; “CFA”) an undertaking in a collective investment scheme (“UCI”) is a “body set up to provide the service of collective asset management, whose capital is obtained from multiple investors through the issue and offer of units or shares, managed upstream in the investors’ interests and independently by the same, and also invested in financial instruments, credit, including credit backed, in favour of subjects other than consumers, by the UCI’s capital, equity or other fixed or non-fixed assets, on the basis of a predetermined investment policy”.

In brief short, UCI’s purpose is to allow investments of sums of money in through financial instruments (e.g., the UCI’s units) of sums of money collected from professional and retail investors on the basis of a predetermined policy, which includes a description of the level of risk related to such investments.

UCIs can take the form either of mutual funds or investment companies (namely, investment companies with a variable capital (i.e., SICAVs) or investment companies with a fixed capital (i.e., SICAFs)). The investment in the latter amounting amounts  to becoming a shareholder of the company in question.

On the contrary, a mutual fund requires the appointment of an asset management company whose assets are distinct and separated from those of the mutual fund managed. As a result, investors receive a fund’s units in exchange for the capital invested therein.

As part of the wider family of mutual funds, AIFs are specialised alternative funds, professionally managed with the aim of achieving absolute performance, independent of market trends.

Which are the main novelties introduced by the Decree?

As a general remark consideration, the Decree has changed the thresholds for making investments in AIFs. Indeed, beforehand, only the following subjects were entitled to purchase in AIFs’ units:

1. professional investors (i.e. clients who possess the necessary experience and expertise to make their own informed investment decisions and properly assess the risks they take, such as banks, investment firms, other authorised or regulated financial institutions, insurance companies, collective investment schemes and related management companies, pension funds and management companies, large companies that have at least two of the following requirements: their total balance sheet is equal at least to  € 20,000.000; a their net turnover is equal at least to € 40,000.000 and owns funds of at least € 2,000.000);
2. retail investors who invest a total amount of not less than € 500,000.00;
3. asset management company’s Board members and employees without any entry threshold.

From the entry into force of the Decree, AIFs can be subscribed by:

1. retail investors who, within the ambit of an investment advisory service, purchase AIFs’ units for an initial amount not lower than € 100,000.00, provided however that the total amount of such investment does not exceed 10% of their financial portfolio and takes into account that the initial minimum subscription cannot be split.
2. individual portfolio managers purchasing AIF’s units on behalf of retail clients for an initial amount not lower than € 100,000.00.

As a result, which opportunities for investemnt in AIFs are now available for retail clients?

AIFs are investment funds characterised by: the absence of a link to a particular benchmark, the presence of a fairly high potential return and, consequently, a medium-high risk profile. Moreover, AIFs have a low correlation with the various equity and bond markets.

As a consequence of the entry into force of the Decree, retail investors with medium/large assets are hence being offered the possibility of gaining returns on their investments even when the market trend is in a negative phase, yet bearing at the same time the related risks.

In light of the foregoing, access to these forms of alternative investments to a wider category of potential investors in medium/long term illiquid assets and unlisted companies, may result in increasing portfolios diversification, achieving appreciable returns, and at the same time, providing alternative sources of financing Italian unlisted companies (particularly, SMEs) and fostering Italy’s economic recovery.

The Decree has also established that intermediaries purchasing AIFs’ units on behalf of retail clients and those advising the latter to subscribe to such units must know the financial instruments purchased or recommended, as well as assess their compatibility with their (actual or potential) clients’ best interest. In addition, the latter must provide the above intermediaries with accurate information on concerning their financial portfolio and other investments in AIFs.

How will these novelties impact on an innovative and agile reality such as the Fintechs in our community?

In this scenario, Fintech companies may benefit from the opening of retail investments, particularly in the venture capital and private equity sectors. Given the constant need for higher investments in the real economy, the novelties introduced by the Decree represent a potential boost in the alternative funds’ market, increasing, in turn, the ability to raise capital for the development of start-ups/SME’s with greater development potentials, amongst which we find Fintech companies.