Anti-social AIFMD

The European Social Entrepreneurship Funds (EuSEF) regulation is considered to be one of the most important measures of the European Commission’s Social Business Initiative. 

The idea is to create a passport for social investment funds – i.e. funds that seek financial and social returns by investing at least 70 percent of their AUM in social businesses – which would reduce the regulatory burden on fund managers and enable them to market their funds across Europe. As such, EuSEF aims to provide a solution to a key barrier to the development of social enterprises: a lack of access to capital. The EuSEF label will provide greater transparency, encouraging private and institutional investors to commit capital to social investment vehicles. 

EuSEF was essential to prevent the nascent social investment industry from being crushed by the Alternative Investment Fund Managers Directive. AIFMD was drafted for fund managers of commercial funds of significant size, which are better positioned to deal with a heavy regulatory burden and for which national legislative frameworks already existed. 

Social enterprise and the investment funds catering to their needs are much smaller in size (according to the 2012 EVPA survey the majority of investors allocated less than €2.5 million to venture philanthropy and social investment). They also have very different objectives from commercial funds, and there are only a limited number of them across Europe. This is an industry that needs to be nurtured – not bogged down with heavyhanded regulation. 

So EuSEF was vital – and news that a lighter version of the regulation is being introduced has been welcomed by the social investment sector and its representatives. 

However, there are very few countries in Europe today that have created special processes for registering EuSEFs (the UK being one of the few examples). There is thus a risk that in many countries such funds won’t be set up for a while – and the regulation will mostly foster the growth and development of social investment markets in countries where they are more advanced already. 

In four years’ time, there’ll be a review of whether EuSEFs succeeded in building a robust social business sector and social investment market in Europe. It will then be decided whether the scope of the current “AIFMDlite” regulation should be extended – or whether it should be brought closer to the AIFMD for mature markets. n

Eva Varga is the Director for Portfolio Performance at NESsT. She’s also a member of the European Commission’s Expert Group on Social Entrepreneurship (GECES).