bsi Real Asset Investment Association (EU Transparency Register No. 83251852142-10) welcomes EBA’s work on shadow banking. We truly thank you for giving us the opportunity to share our thoughts on your ideas.
Your work on how to address the exposure of non-bank finance will very much affect our member’s business model. We would encourage EBA to rethink the approach of including all different kinds of AIFs in the definition of shadow banking, if there is no differentiation in the legal consequences. Since the AIFMD regime captures such a wide range of totally different funds models, we are in favor of a proportional approach which takes into account the AIF’s particular riskiness instead of almost only theirs name, given through European Law.
With reference to EBA’s concerns on shadow banking, mentioned at Point 3.1.1. (page 7) of the consultation paper, we shall explain and mirror our legal and practical views on why EBA’s concerns do not match with the risks in AIFs investing in real assets:
1. Run risk and/or liquidity problems:
Real Asset Investment Funds are mainly closed-ended. There simply is no such thing as run risks in our member’s funds.
Furthermore assets (e.g. real estate, aviation, shipping, renewable energy projects etc.) are tangible. They are regularly acquired at the beginning of the fund’s lifetime and held by the fund until the end of its duration. In combination with the closed-ended type, liquidity management sure plays its role, but has a much lesser influence on possible risks than in open-ended funds and/or in funds, where assets are bought and sold on a frequent basis. Nonetheless liquidity problems can occur e.g. if maturity transformation is not regarded carefully. But therefore, it is already an AIFM’s duty to establish and be compliant with its liquidity management (Art. 16 AIFMD). We encourage EBA to precisely differentiate on this, when assessing the exposure.
2. Interconnectivity and spillover
Real Asset Investment Funds are single financial entities. Of course as all business models, they can face economic difficulties. If the occur, they mainly stem from the real asset markets (e.g. real estate prices going down, lease defaults etc.) or from mismanagement in the funds (e.g. finding new tenants in real estate or prolonging existing contracts) or its structure (e.g. use of currency swaps). But, volatilities of the financial markets (as mentioned other than currency risks) do in principle neither affect the funds nor the managers. However, credit finance counterparties like banks are exposed to potential risks of the funds. But even given that there is an interconnected risk, the average closed-ended funds’ volumes of about 60 Mio. EUR in 2014 (source: bsi industry figures 2014) are already barely high enough to cause unrulable risks for these banks. From our point of view spillover effects are unlikely to happen, at least we have never seen such in the past.
3. Excessive leverage and procyclicality
Real Asset Investment Funds do not deploy excessive leverage at all. The ratio between own funds and debts is normally not higher than 2-3. So debts are regularly not higher than twice of three times the sum of the own funds. Under German law, closed-ended AIFs marketed to retail Investors are furthermore obliged to limited their leverage to a maximum of 60% of debt in the funds volume. Therefore procyclicality and confidence crisis are hardly to imagine in this field.
4. Opaqueness and complexity
In comparison to other more liquid and hybrid funds structures, closed-ended AIFs in real assets are quite simple: AIFMs set up new AIFs, which invest in real assets, which they acquire at the beginning of the lifetime. The real asset is managed and maintained during the lifetime. Cash-flows out of the asset are used for repayment of debts and for the management and for the depository fees. Profits are distributed to the investors. At the end of the lifetime, the asset is sold and if there is no wear and tear, profits are again distributed to the investors. Funds durations vary between 15-20 years. Expertise is mainly needed in the asset management itself, less financial than economic knowledge is needed thoughout the lifetime of the fund
Our funds also use more level structures. They usually invest in an SPV which manages the real asset. But also umbrella funds are known in the market. Nonetheless, funds structures and participants are fully transparent and we would seriously doubt that they are opaque or complex, in comparison to other funds structures and methods.
To conclude: All this shows that the approach used by EBA – differentiating only between UCITS and AIFs – is way too simple. Please do consider the totally different structures and methods that AIFs can employ.
Finally to be absolutely clear: We do not per se want AIFs investing in real assets to be carved out of the scope of this initiative. If there is risk, one should surely address it. But we strongly encourage EBA to find proportionate legal consequences if our funds remain in the scope. Therefore it is essential to use the utmost of transparency which the AIFMD regime already ensures. Unfortunately the AIFMD reporting system towards ESMA and the statistical reporting obligation towards the ECB do not function yet, although the legal obligation is already in place since July 2013. We ask EBA to take into account this excessive accumulation of data, which should be available soon. Only through this assessment, exposure can be identified correctly. Without this assessment we fear that EBA’s recommendations would not make the desired tribute in tackling exposure where it really occurs.