When working with clients over the last few months, the fund structure that has been coming up more often in conversation lately is the UCI Part II. For a structure set up many years ago, its surge in popularity in 2022 may seem surprising. However, given the recent increase in private asset allocations and their continued expected growth, it makes more sense. PwC has forecast private markets to grow to $4.9tn globally by 2025 and make up 10% of global AuM. This is being fuelled by growing allocations from institutional investors and a more recent drive from high net worth (HNW) and individual investors looking to diversify their portfolios and access illiquid investments.

Market Background

• Allocations via private wealth channels into private markets are increasing.  Hamilton Lane estimates that a 1% increase in high-net-worth allocation increases the size of private markets by 10% – a dynamic that could dramatically expand the amount of capital flowing into the private markets.
• GPs and asset managers are looking to capture this increasing demand with new fund structures that meet the requirements of this new investor pool.
• Institutional capital is capping out and becoming increasingly competitive. Many GPs and asset managers are therefore looking to build out their intermediary network to diversify their investor base and access individual investors.
• Traditional asset managers are willing to leverage their investor network to offer exposure to new asset classes as a consequence of the historically low interest rate environment and lower returns of more traditional/liquid asset classes.

Against this market background, there is a major focus on the private wealth distribution channel.

Growth in Private Wealth Distribution of UCI Part II

• Private wealth distributors are now offering private markets access as part of their core offering – not just in the HNW bracket.
• Private wealth advisors prefer regulated structures, as they can allocate capital on their discretionary mandates.
• In response to retail investor demand, many managers are raising semi-liquid products. These not only sit well within private wealth portfolios, but allow for regular subscriptions, unlike closed-ended structures.
• Semi-liquid products allow advisors greater flexibility in their allocations, meaning they can better maintain the proportion of a portfolio in illiquid investments.

To consider some of the nuances of this structure, I sat down with Florence Stainier, Partner in the Investment Management practice of Arendt & Medernach, where she specialises in legal and regulatory matters related to investment funds and management entities. She speaks to why the structure is receiving renewed attention, its growing adoption, and explains some of the key regulatory considerations governing UCI Part II.

Key attributes of UCI Part II by Florence Stainier 

Who has access to UCI Part II and in what capacity?

• UCI Part II funds are available to all types of retail investors with no restrictions as a matter of principle and can be used to invest in all kinds of assets with true flexibility in terms of diversification requirements.
• UCI Part II can be structured under an umbrella structure with the ability to offer different strategies, liquidity features and be available for different target markets.
• UCI Part II can be open or closed-ended, allowing asset managers to accommodate the liquidity needs of their target audience in line with the investment strategies offered.
• An additional reason for the increased interest for UCI Part II stems from the recent attraction for the European Long-Term Investment Funds (ELTIF), which can be created as a UCI Part II combining the two regimes and offers different types of strategies under ELTIF format.

What are the key regulatory considerations?

• Although UCI Part II funds are available to retail investors, they only benefit from the alternative investment fund passport for professional investors. Hence, when selling a UCI Part II abroad to non-retail investors, one needs to check, on a case-by-case basis, whether this is possible in the relevant jurisdiction.
• When targeting countries where selling alternative types of funds to retail or semi-retail audiences is allowed, UCI Part II has proven to be the perfect tool since it combines the retail framework of the product with a very flexible set-up in terms of investment strategies, asset classes, diversification and liquidity requirements.
• Since UCI Part II funds are regulated vehicles subject to the Luxembourg regulator’s initial approval and ongoing monitoring, specific attention has to be paid to the balance between liquidity offered to investors and the one of the investments. It is therefore necessary to manage liquidity which involves implementing liquidity pockets or liquidity management tools that allow redemption requests to be authorised under limited conditions.
• It is also not uncommon that the regulator would request to limit the type of retail investors targeted by imposing high minimum investments or restricting the fund to investors benefiting from some advice when they consider that the UCI Part II is exposed to too risky assets or do not offer an appropriate liquidity regime suitable for pure retail investors.
• In common with the other types of Luxembourg vehicles, UCI Part II funds benefit from the Luxembourg ecosystem and expertise.

The road ahead

As private markets grow, there will undoubtedly be greater interest in existing fund structures that have the capability to cater to increasing demand for these assets from a variety of investors.

The growing use of the UCI Part II structure and the upcoming revision to the ELTIF to allow more flexibility speak to this, and points towards the growing role of private assets in portfolio construction, both as a means of diversification and as a way to access higher returns. 

Florence adds that the expected review of the professional investor concept as part of the anticipated AIFM review could even lead to a less stringent classification of what constitutes a professional and could see passport access benefits extended to wider categories of investors; notably HNW individuals.

The tokenisation of funds could also be an additional driver towards the increased attractiveness of UCI Part II.

Want to learn more about the impact this fund structure and others will have going forward? Read our whitepaper Weaving Private Assets into Wealth Portfolios: Evolving Structures to Meet Evolving Needs or get in touch for a conversation.