Fund managers have called for a review of rules governing how direct lending and other illiquid credit vehicles can be marketed to Ucits investors.

Such reforms would open up European infrastructure and other credit opportunities to Asia investors via the Ucits fund structure.

However, regulators have been warned not to widen the investor base too fast, amid concern over putting complex illiquid products in a retail structure.

Demands for change were made at a conference last week hosted by the Association of the Luxembourg Fund Industry (Alfi), and come just months after a Europe-wide investment programme was announced.

The so-called Juncker plan, named after European Commission president Jean-Claude, is designed to stimulate €315 billion ($342 billion) of investment in Europe by guaranteeing €21 billion of loans made by European banks.

Better treatment of credit funds by Europe’s regulators, say managers, would mean institutional investors would have the ability to play a role alongside this initiative in delivering investment to Europe’s ailing economies.

“The regulators have worried about the expertise [of asset managers in providing direct lending] in the past,” said Symon Drake-Brockman, managing partner at Pemberton Capital Advisors in London. He noted that in Germany and Italy selling direct lending funds to institutional investors was still prohibited. This fear is no longer justified, he explained, with some of the largest institutional investors now present in the space, including Allianz, Axa and Legal & General. L&G bought a 40% stake in Pemberton Asset Management last July.

Deborah Zurkow, head of infrastructure debt at Allianz Global Investors, stressed that it was still very hard to find a structure for an illiquid debt fund that allowed it to be distributed easily at a European level. Listing a fund turned the investment into equity, attracting harsher solvency and capital treatment, she noted.

Funds under the Juncker plan will be channelled by the European Fund for Strategic Investments (EFSI). A total of €5 billion of guarantees will come from the European Investment Bank and €8 billion will be collected from Germany, France and Italy. By guaranteeing the riskiest parts of the loans these enable banks to extend financing up to 20 times the original guarantee, noted Rémi Charrier, head of institutional business development at the European Investment Fund.

Charrier noted that it also faced challenges in distributing its funding guarantees across borders. “The documents that guarantees the banks’ risk is treated differently in one European country against another,” he said.

The European Commission move follows the rapid expansion of Europe’s illiquid credit fund market over the last year. Before L&G bought its stake in Pemberton last July, London-based Hayfin raised €2 billion from institutional investors in March, in a direct lending fund targeting European mid-sized firms, the largest fund to date. The number of asset managers operating in this space has grown from one to 25 since 2012, according to Zurkow.

Insurers entering the market still find it difficult, given the harsh treatment of loans under Solvency II, noted Peter Arnold, global head of institutional fund distribution at Citi, but the L&G deal showed their interest in the sector. Jonathan Bowers, partner and senior portfolio manager at CVC Credit Partners, noted that the appetite for illiquid credit funds is especially strong on the part of sovereign wealth funds, pension funds and US endowments.

But Zurkow warned against extending the investor base too quickly, notably to retail investors. “There’s a real danger in taking complex illiquid products and putting them in a retail structure. You can’t just take 10 illiquid deals together and create something that is liquid.”