Complex investor eligibility tests, Financial Conduct Authority (FCA) rules and unresolved tax frictions continue to hold back the growth of UK private debt funds, according to industry insiders.
Speaking to Alternative Credit Investor, Mark Wilton, head of European investments at Corinthia Global Management, said that prudential and regulatory capital treatment in the UK poses challenges for certain institutional investors committing to private debt funds, particularly insurers.
“Tax transparency around investors is often a limiting factor for certain groups. It can be jurisdiction-specific,” Wilton said. “If I had a magic wand, I would make sure that all investors were taxed based on investing in debt, and therefore their capital charges are less. That would make it more attractive for them to invest.”
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He added that this is a particular problem for insurers because, when they invest through a fund, the holding is treated as an equity exposure, “which carries a high capital charge, even when the fund is a debt fund and all the instruments are debt”.
Regulatory barriers also continue to make the UK less competitive than alternative credit fund hubs such as Luxembourg, limiting fund availability, discouraging UK-domiciled structures and reducing investor access, according to Ayesha Corrine Singh and David Nisbet of law firm Squire Patton Boggs.
“Requirements under the FCA Handbook, the consumer duty and the UK’s robust governance standards impose significant operational, reporting and compliance burdens on managers,” Corrine Singh, a partner in the firm’s financial services practice told ACI. “This could lead to firms choosing not to issue products in the UK and instead structuring them offshore. That becomes an indirect barrier to investment by limiting the breadth of funds that reach the UK market.”
Nisbet pointed to long-standing issues within the UK tax code for credit fund structures, frictions that do not arise in jurisdictions such as Luxembourg.
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“The UK withholding tax on interest payments, particularly where overseas investors are involved, creates unavoidable tax leakage within the fund and impacts headline investor returns,” he said. “The UK’s rules on interest deductibility add another layer of tax leakage within most typical UK fund structures.”
However, Corrine Singh noted that the government has begun to address some of these challenges, launching a consultation in April aimed at “reducing unnecessary barriers to investment, easing regulatory burdens on asset managers and modernising outdated thresholds”.
Nisbet added that the introduction of the Qualifying Asset Holding Company regime marks a “significant step” towards resolving some of the tax issues, aiming to replicate many of the beneficial features offered in jurisdictions such as Luxembourg.
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