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Portuguese Investment Funds: Current Market Scenario & Incoming Opportunities

By Pedro Simões Coelho & Pedro Bizarro
Posted: 4th March 2013 09:59
These days, articles about Portugal in the international economic press are often packed with references to austerity measures, economic downturn and the international assistance programme.  The authors of this article agree that any realistic assessment of the Portuguese economy must acknowledge that the decaying economic conditions have taken their toll.  However, they will adopt a more optimistic tone in the current article, attempting to expose some opportunities which, in their view, may exist for investment funds operating in Portugal.   
In accordance with data from the Portuguese Securities Commission (“CMVM”), since June 2011 (around the time the IMF/ECB/EC assistance programme became public), the Portuguese market has witnessed one significant trend: an apparent flight from more traditional funds (which in Portugal usually means regular funds investing in plain vanilla assets, notably securities or indexes) to special investment funds, namely hedge funds and funds investing in riskier and less liquid assets.  Investment in these two types of funds put together amounts roughly to the amount invested in real estate investment funds, which remained mostly stable throughout the last 18 months.  In addition to being a tool for applying capital in the securities market, many real estate investment funds were used by small groups of investors (sometimes just one) as SPVs for developing and operating real estate projects.  This has greatly contributed both to the high amount reflected in the graph above and to the relative stability of such amount.   
As for the number of investment funds in the market, the last year and a half has witnessed a decrease in each of the above categories.  In keeping with what was said in the previous paragraph about real estate investment funds frequently being used as SPVs, the reduction in the number of such funds was only slightly over 3 percent, against 10 percent.  for special investment funds and 11 percent.  for more traditional funds. 
From a legal and regulatory perspective, the last 18 months have not been a period of change for Portuguese investment funds.  We believe this may be due to the entities which are usually involved in bringing about new laws and regulations affecting this industry having shifted to other priorities.  The Portuguese government, particularly the Ministry of Finance, has been very active in enforcing the conditions of the international assistance programme.  As for the CMVM, it is now, more than ever, actively supervising the activities of financial intermediaries, including fund managers, with plenty of onsite inspections and information requests.  In any case, Portugal is yet to implement UCITS IV Directive (let alone the AIFM Directive), and some amendments to the real estate funds legal framework (which is separate from the law regarding collective investment schemes in general), first proposed in 2010, are on hold.  However, in order to protect foreign funds from the adverse consequences of the non-implementation of UCITS IV, the CMVM has put in place the procedure resulting from Regulation (EU) no. 584/2010, of 1st July, which allows foreign funds to be marketed in Portugal pursuant to a simple notification process made under UCITS IV rules.  So far, this seems to be working well for everyone, as foreign management companies are spared a number of requirements which were applicable under UCITS III (namely, the need to provide Portuguese translations of fund documents). 
In 2013, it may be worth looking into the implementation of both (the rest of) UCITS IV and the AIFM Directive, which together with other long awaited changes is likely to lead to a complete overhaul of Portuguese collective investment schemes law.  We also expect the amendment process in relation to the real estate funds framework to be resumed, which could lead to relevant changes, notably concerning the rules applicable to the way in which real estate is valued and accounted for by funds.  Finally, an important development from abroad may prove relevant: if US regulators enact the regulations implementing the Volcker Rule, Portuguese fund managers and marketing entities should also look at how the limitations on investment in funds by financial entities may object to the placement in the US market of certain structures, notably in the venture capital sector.    
As for market trends to watch in 2013, the economic downturn and a recent liberalisation of the real estate lease framework may come together to expand the residential lease market in Portugal, especially in and around major cities.  Portugal has been one of the countries in Europe with the highest home ownership rates.  If, as it now seems inevitable, this is to change, an opportunity may come for residential special real estate investment funds (known as FIIAH, their Portuguese acronym).  These funds were created in 2009 to assist families unable to pay their mortgage installments.  The idea was for these families to sell the houses to the relevant FIIAH, use the proceeds from the sale to pay their mortgage loan and then rent the house back from the fund, with a repurchase option exercisable later on.  Although some FIIAH have been created since 2009, their use has fallen short of original expectations.  However, the aggregate portfolio of FIIAHs in Portugal grew 41.3 percent in 2012 (equivalent to a €133.9M increase)more than any other category of real estate investment funds.  With the economy pressuring homeowners, demand for the type of solution provided by FIIAHs is expected to grow even further.  Naturally, the fact that they enjoy a very favourable tax regime when compared to other alternatives to hold real estate (including other real estate investment funds) is also relevant.
Another possible source for value in 2013 in Portugal is the securities market.  Share prices are deemed to be relatively low (although slowly rallying), but certain shares have risen significantly since mid-2011 and early 2012.  The general opinion is that there is still room for recovery in 2013, which may represent an opportunity for funds investing in equity.  On the debt side, some Portuguese companies issued high-yield (or almost high-yield) bonds in 2012.  With the downward trend of secondary market interest rates for Portuguese public debt (which is generally expected to continue in the near future), there may be an opening for investment funds buying fixed-income bonds on the secondary market. 
Venture capital may also prove an interesting field to explore.  The Portuguese government has vowed to change its budget balancing focus from tax increases to spending cuts.  Recently, there was even talk of selective corporate tax cuts which could lead to Portugal (or, at least, some companies established in Portugal) having one of the lowest corporate income tax rates in the European Union.  If spending cuts are applied and a buffer is gained which allows for such tax cuts, it will be interesting to see the extent to which these will impact small-to-medium projects.
In conclusion, 2013 will definitely be a challenging year.  However, a timid optimistic trend may be sensed in the air, as demonstrated by Portugal’s return to the public debt market, which resulted in a €2.5 billion 5-year issue at a 4.89 percent.  interest rate, of which 93 percent.  was placed abroad, with demand far exceeding supply.

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