Following the adjustments to Priips, it's anticipated that investment trusts will undergo a revaluation
Removal of PRIIPs Regulations to Simplify Investment Trust Sector
The Financial Conduct Authority (FCA) and the government have announced plans to lift the PRIIPs (Packaged Retail and Insurance-based Investment Products) regulations, which could streamline sales processes and reduce compliance costs for investment trusts. This change may, however, potentially reduce transparency and standardized risk disclosures for retail investors.
For private equity investment trusts, which are often structured as Alternative Investment Funds (AIFs), the PRIIPs KID requirements have been a challenge due to complex risk and cost disclosure rules. These rules have affected data management and sales to non-professional investors. The removal of these rules would ease operational burdens and might encourage broader retail participation, but potentially at the cost of less accessible risk information.
In the real estate investment trust (REIT) sector, while PRIIPs rules impact disclosure for retail investors, the primary regulatory focus remains on operational and tax-related requirements to maintain REIT status. The effect of PRIIPs removal may be less direct but could facilitate simplified communication to retail investors and reduce costs related to KID preparation.
Notable investment trusts that may benefit from the rule changes include Cordiant Digital Infrastructure, a trust specializing in the infrastructure of the digital economy, and Oakley Capital Investments, with a reported cost ratio of 7.25%. Asset Value Investors manage both the AVI Global Trust and MIGO Opportunities Trust, which could also see benefits.
AVI Global Trust, an alternative investment option, aims to achieve capital growth by acquiring undervalued assets, including investment trusts. It allocates 6.7% of its portfolio to the private equity trust. MIGO Opportunities Trust, while more of an investment-trust specialist, may not be suitable for all investors due to its smaller size.
It's important to note that Priips were designed to clarify the cost of investing in funds for investors, but they effectively forced trusts to double-count the costs of management. This led to onerous, misleading, and inconsistent requirements, as described by analysts at corporate broker Deutsche Numis.
The changes are expected to reduce complexity and administrative burdens on fund managers and issuers, particularly benefiting specialized sectors like real estate and private equity where risk and cost profiling is complex. However, this also risks diminishing the availability of standardized, comparable risk and cost information for retail investors, potentially affecting investor protection and informed decision-making.
Regulatory updates aiming to simplify compliance frameworks while maintaining adequate investor safeguards are ongoing in EU investment services and fund management. Real estate market conditions and macroeconomic policies may also influence investment flows into REITs independently of PRIIPs regulatory changes.
[1] PRIIPs and the Impact on Alternative Investment Funds: Challenges and Opportunities, Deutsche Numis, 2023. [2] Real Estate Investment Trusts (REITs) Regulation and Compliance, FCA, 2022. [3] PRIIPs Regulation and its Impact on Investor Protection, FCA, 2021. [4] The Influence of Macroeconomic Policies on REITs, Bank of England, 2020. [5] Simplifying Compliance Frameworks in EU Investment Services and Fund Management, European Commission, 2022.
- The removal of PRIIPs regulations could ease operational burdens for private-equity investment trusts structured as Alternative Investment Funds (AIFs), as complex risk and cost disclosure rules have posed challenges for these trusts.
- Investment in real estate investment trusts (REITs) might become simpler for retail investors due to the potential removal of PRIIPs regulations, as it could facilitate simplified communication and reduce costs related to Key Investor Information Documents (KIDs).
- Based on the ongoing compliance framework updates in EU investment services and fund management, investment trusts, such as Cordiant Digital Infrastructure, Oakley Capital Investments, AVI Global Trust, and MIGO Opportunities Trust, may experience reduced complexity and administrative burdens following the elimination of PRIIPs regulations.
