Contractual OPCVM: a flexible and secure tool at the disposal of French asset managers

The french contractual OPCVM, in its configuration post october 2008 application decree, is a tool with features of interest for management companies, investors and service providers: flexibility, security, adaptability and governance.

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The french contactual fund is a UCITS fund under French law, extremely flexible in its operation. It is not subject to a prior authorization but only to a statement to the AMF. It must be managed by a management company, duly authorized by the AMF, whose business plan includes directives specific to this type of fund, and the underlying considered.

This investment solution offers flexibility. It enables the design of a product suited to the type of management required by investors and managers (capital investissement, asset management, alternative investment such as real estate, patents ...) while enjoying the security of the French regulatory framework.

Several features of this structure should be highlighted to better understand its value in a time when:

- Investors are looking for a product suited to their needs (return on investment over the long term, funding available to the real economy, innovation financing) and constraints (regulatory ratios, ALM monitoring...);

- End customers want secure and operational products that are not purely "speculative"

- Service providers (custodians, fund administrators, auditors ...) give an increasing importance to the adequacy of legal structure and strategy;

- Regulators are considering promoting the development of an on-shore, regulated and monitored alternative management industry (AIFM directive);

- And the managers must meet all these needs while implementing multiple asset classes strategies and more and more diversified management techniques to provide the risk / return profile expected by customers.

In this context, why create a contractual fund?

- a. For operational security

As a fund under french law, its securities are deposited with a custodian bank which is necessarily french and subject to a duty of restitution of assets. The custodian must also ensure that those securities are not virtual. The depository is pivotal in the security offered to investors. Indeed, even in case of bankruptcy of the management company, investors are confident that the fund’s assets will not be used to discharge all liabilities of the management company. In addition, the depositary control ensures that the management is actually carried out in accordance with the contract of the fund, that is to say the prospectus on the basis of which investors have subscribed.

Moreover, in some cases and for certain management strategies, the ability to contractually define the responsibility of the custodian provides new opportunities for funds whose strategies involve the use of the services of a Prime Broker.

- b. For the flexibility

The french OPCVM is subject to virtually no constraints in terms of selection and concentration of financial assets and property. This flexibility makes it one of the best investment vehicles in Europe to host simultaneously a set of strategies related to securities, real estate, unlisted shares, bank debt (as a "loan") ...

The valuation remains the responsibility of the manager who controls the prices used in underlying assets valuations. The contractual fund can and should provide adequate liquidity to assets under management, knowing that this liquid can not go beyond three months. However this liquidity may be limited, if required by the strategy of the fund or its liabilities, using lockup and / or redemption penalties.

The contractual fund can manage private equity investments as well as investments in listed equities, real estate or wine.

Finally, nothing prevents the creation of different classes of shares, adjusted to target investors, or compartments - not joint and several - implementing different management strategies.

Contractual funds, however, are restricted to certain fund investors (see Monetary and Financial Code for definition). They are governed by Articles L214-35-2 to L214-35-6 of the Monetary and Financial Code. The investment universe, which is particularly large since it consists of "property" and not just "financial instruments", must still meet the following criteria:

a) Ownership of property is based either on an entry, a notorial deed or a private deed whose probative value is recognized by French law;

b) The property is not subject to any security other than those which may be made to achieve the investment objective of the organization;

c) The property is subject to a valuation with a reliable price, calculated accurately and regularly, which is either a market price or a price provided by a valuation system able to determine the value at which the asset could be traded between sophisticated parties and contractor in a transaction under normal conditions of competition;

d) The liquidity of the property allows the organization to meet its execution requirements of repurchases for its shareholders and holders defined by its statutes or regulations.

The contractual funds have now, subject to the conditions mentioned above, a wide choice of investment. They can, for example, invest in works of art, shares of containers, forestry, infrastructure, "loans " ... They may also, under certain conditions, acquire intangibles such as patents or copyrights.

The terms of subscription / redemption of fund shares are set by statute or regulation. Lock-up can be set freely and allowing the manager to limit the assets / liabilities asymmetry of the fund. Moreover, as with FCPR or OPCI with simplified operating rules, subscriptions can be paid in installments to better handle the launch phases of these funds. This provision is intended to avoid idle resources in the fund at an early stage.

- c. For governance

Governance is becoming a major theme in the evolution of asset management in France and Europe. At European level, the various reflections on the evolution of the market all contain themes on governance. At French level, our market is the latest to have no governance at management level, particularly because of the legal nature of FCP whose managers are the unique investor representatives. It is obvious that the current situation leads to a situation of moral hazard: the interests of managers are not necessarily in line with the interests of investors. This problem is less acute with the Unit Trust (SICAV). Creating a unit trust, whether contractual or not, requires, like all SA, the establishment of a governance structure, especially of a board of directors.

Reinhold Partners , December 2010

Article also available in : English EN | français FR

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