It could be due to a lack of internationalization of the Spanish market, or to the fact that the sector is still in a phase of maturation and consolidation.
For the first time, a comparative study has been carried out on the main terms and conditions applicable to closed-end alternative investment funds (known as AIFs) established in Spain.
Among the conclusions reached, it was observed that the terms and conditions of these funds are particularly homogeneous, a fact that could be due to a lack of internationalization of the Spanish market, or to the fact that the sector is still in a phase of maturation and consolidation. On the other hand, this makes it easier for investors to better understand the applicable terms, their comparison, and their predictability.
The results show that the most common investment strategy among AIFs is venture capital, demonstrating the importance of the entrepreneurial ecosystem in the Spanish market, with major centers even at the European level (Barcelona and Madrid leading the way, but followed by others such as Malaga, Bilbao, and Valencia). If we look at the data by fund size, the most common strategy is private equity. The order among the different asset classes is as follows:
By number of funds: venture capital, private equity, funds of funds, infrastructure, multi-asset, real estate, search funds, special situations, and debt.
And by size: private equity, venture capital, funds of funds, real estate, infrastructure, multi-asset, special situations, search funds, and debt.
Another conclusion of the study is that Spanish legislation, both regulatory and fiscal, is extremely detrimental to the creation of closed-end AIFs aimed at investing in debt. This fact seriously harms both venture capital and companies, which see this financing option as practically non-existent for them, forcing them to resort to traditional bank financing and other insufficient forms of financing.
With regard to the territorial focus of closed-end AIFs, it is concluded that 47.4% of these funds have Spain as their geographical investment focus. There are many reasons for this territorial concentration, both because of the significant weight of public entities as AIF investors (including the ICO and the ICF, among others), which require funds receiving public money to invest a significant portion in Spain, and because of the characteristics of Spanish fund managers themselves. In particular, we must bear in mind that most of these management companies only have a physical presence in Spain, without foreign branches or subsidiaries, a fact that makes it very difficult to identify opportunities outside the territory and to compete abroad.
It is important to bear in mind that one of the most important issues for investors when investing in these funds is the existing costs, among which the management fee and the carried interest stand out. The data show that the vast majority of AIFs charge a management fee of 2% and a carried interest of 20%, with the average management fee being 17.74% and the average carried interest 12.7%. It is worth noting that these fees vary depending on the investment strategy. Specifically, from highest to lowest fee among the most relevant asset classes, they are ranked as follows: venture capital, private equity, infrastructure and real estate, and funds of funds. For example, the average management fee for venture capital is 2.07%, while that for funds of funds is 1.40%.
On the other hand, in terms of sustainability, 50% (by number of funds) and 70% (by volume of funds) are classified as SFDR Article 8 or 9 financial products. That is, as funds that aim for sustainable investment (those under SFDR Article 9) or the promotion of environmental or social characteristics (those under SFDR Article 8). However, only 14% of closed-end AIFs include the obligation to invest in activities aligned with the European Union’s environmental taxonomy. Therefore, in terms of reporting and transparency obligations, closed-end AIFs make significant commitments, but do not guarantee that their investments will have a real impact.
This does not mean that the investments do not ultimately result in social and environmental improvements, but rather that they cannot commit to ensuring that the impact complies with the legal requirements of the European taxonomy. We will see whether, following the ongoing legislative simplification, AIFs can commit to generating real impact at rates higher than the current 14%.
In any case, the data reflect the need to improve the regulations and taxation of AIFs for debt investment, the real impact on sustainability, and the internationalization of Spanish asset managers.
Àlex Plana Paluzie, partner at Across Legal.
