ESMA promotes common approach to investment-fund loan origination

The European Securities and Markets Authority (ESMA) has come out in support of a common EU approach to loan origination by investment funds, publishing an opinion on the subject not long after France’s financial markets authority said it would like French funds to be able to move into this business.

ESMA, one of three European supervisory authorities, flagged the French initiative when it noted that loan origination by funds was, at least partly, allowed in the majority of EU member states and that several of them, such as Germany, Ireland and Spain, have set up bespoke frameworks.

A common approach at EU level, ESMA said, will help create a level playing field and reduce the potential for regulatory arbitrage.

“This could, in turn, facilitate the take-up of loan origination by investment funds, in line with the objectives of the Capital Markets Union (CMU),” it added.

ESMA noted that the Commission’s CMU action plan cited the possibility of European Long-Term Investment Funds (ELTIFs), for example, to originate loans to a certain extent.

The supervisory authority said the elements presented in its opinion “should ideally form part of a harmonised European framework on loan origination”.

It said this could be achieved in different ways – through a legislative proposal, for example, or by way of an ESMA instrument supplementing the Alternative Investment Fund Managers Directive (AIFMD).

ESMA raised several issues in its opinion it believes the European Commission should take into account for a consultation intended to be launched this quarter, including systemic risk, exemptions for certain fund types, authorisation versus registration requirements, and the scope of fund operations.

In France, the financial markets authority AMF recently set out its thinking about some of the issues, having been motivated by the entry into force of the EU ELTIF regulation to consider adapting rules to allow French investment funds to grant loans.

At the moment, French funds can lend to companies but not by way of primary loan origination; as pointed out by ESMA, investment funds can also provide credit in the form of “loan participation” or “loan restructuring”. 

Xavier Parain, managing director in charge of the asset management directorate at the AMF, told IPE: “There is scope for asset management companies to do direct lending, and that can really benefit SMEs to have new actors, with a different approach to lending than banks.”

He said there was strong interest among a variety of French asset managers to be able to add loan origination to their activity.

Indeed, as emphasised by his colleague Patrick Simion, a financial expert at the AMF, in contrast to the situation in some other countries, in France, investment funds will be allowed to be diversified – i.e. pursue other business activities distinct from granting loans.

The AMF envisages that only certain types of professional funds be able to grant loans and that these will be subject to additional constraints – on their leverage and use of derivatives, for example.

It also intends for investment management companies to be required to report regularly to the AMF and the central bank on all loans granted, so that lending can be monitored over time.

Management companies wishing to originate loans should be licensed by the AMF in accordance with the AIFMD and “have a programme of operations that allows for the possibility of granting loans”.

The AMF has also said it would like “the new rules to ensure that equivalent principles are applied among different lenders within a clarified legal framework, taking into account each operator’s economic model” (like insurance firms).

The pending introduction of loan origination by investment funds is the latest move in France to grow the non-bank lending market.

In late 2013, for example, the French insurance code was amended to make it easier for insurance companies to lend to unlisted companies and invest in unlisted loan funds, as well as unlisted bonds.

This paved the way for the creation of a new type of investment vehicle, Fonds de Pret à l’economie (funds of loans to the economy, or SME loan funds).

The Novo funds sponsored by Caisse des Dépôts et Consignations were launched in 2013 under this new FPE framework, with a decree in December 2014 removing further barriers and expanding the universe of eligible investors.   

Taking advantage of these new investment freedoms, in February this year, AG2R La Mondiale and Klesia, two major social protection groups, launched a PME Emplois Durables, a €210m fund designed to channel institutional money to SMEs.

It will invest in a mix of debt and equity.