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Closed-ended funds

The closed-ended fund industry in Europe is bracing itself for the impact of extensive new regulations initiated by politicians and regulators in the aftermath of the financial crisis of 2007 - 2009. The Alternative Investment Fund Managers Directive (AIFMD) which comes in to force in the EU on 22 July 2013 will introduce major changes affecting the management, marketing, custody and administration arrangement for closed-ended funds. Whilst these may present opportunities - particularly in relation to the use of the "marketing passport" - the changes will be an upheaval for the industry and the scope and extent of that upheaval still depends on the final form of the AIFMD's implementing measures. Boards and managers of closed-ended funds will need to be able to adapt to the new regime and deal with the implications which the AIFMD raises for their funds.

In addition to the impact of AIFMD on closed-ended funds, a number of challenges face the closed-ended fund industry. In difficult stock market conditions, the shares of closed-ended funds can trade at increased discounts to their underlying net asset value. This can encourage activist hedge funds and other arbitrageurs to take significant stakes in funds with a view to profiting from the liquidation or reorganisation of those funds.

Difficulties in obtaining satisfactory clarification from HM Revenue & Customs of the tax treatment of certain investment strategies have led to the increasing use of Guernsey incorporated vehicles instead of UK incorporated investment trusts. Eversheds Sutherland pioneered the use of Guernsey vehicles for those purposes more than 10 years ago and continues to advise on the launch of Guernsey investment companies which are listed on the London Stock Exchange.

There is also an increasing emphasis on the corporate governance of closed-ended funds which can lead boards to assert their independence from their investment managers and service providers, leading to disputes between a fund's board and its investment managers.

How our closed-ended funds team can help

Eversheds Sutherland has an experienced team led by Ronald Paterson, a member of the Technical Committee of the Association of Investment Companies, who has over 20 years' experience advising closed-ended investment companies and other participants in the investment management industry.

Over the last three years, Eversheds Sutherland has been actively tracking developments on the AIFMD and has responded to public consultations and discussion papers on the AIFMD as well as helping clients and trade associations formulate their own responses. Eversheds Sutherland partners and lawyers have regularly spoken at seminars and conferences on the implications of AIFMD for their clients and the sector generally.

Eversheds Sutherland has a track record of advising on the launch of innovative funds, both in the UK and internationally, investing in a wide range of asset classes including direct private equity investments, private equity funds, quoted securities, structured notes and hedge funds. We advised on the £160m launch of The Local Shopping REIT PLC, the first real estate investment trust company to launch in the UK, which listed on the London Stock Exchange. We also acted for Numis on the launch of Jon Moulton's Better Capital fund (an offshore investment company) and its admission to AIM and on subsequent fund raisings, including its admission to the London Stock Exchange's Official List.

Eversheds Sutherland also has tax experienced lawyers who specialise in advising on the taxation of all types of investment funds including closed-ended funds, which is particularly important given the special tax status of investment companies.

We have extensive experience of advising closed-ended investment companies on tender offers to return cash to their shareholders by way of share buybacks to satisfy the requirements of arbitrageurs who have taken stakes in companies whose share price does not reflect the companies' inherent value. Eversheds Sutherland is also experienced in advising on disputes between investment companies and their investment managers and service providers.