The trend for increased regulation and capital requirements, which is unlikely to be reversed anytime soon, has prompted the formation of a new type of institutional investment – a ‘regulatory capital fund’.
The fund, managed by a privately owned funds management start-up, Regulatory Capital Management, is an Australian-domiciled wholesale trust open to super funds and other large investors. From the investors’ perspective, it fits within the expanding ‘alternative debt’ range of fixed interest investments.
For Australian public offer super funds, the fund will provide an opportunity to fund or capitalize their Responsible Superannuation Entity, if they haven’t already done so, when new capital requirements under the ‘operational risk reserve’ provisions emerge from their regulator, APRA.
The Responsible Entities for retail managed investment schemes, which are ASIC regulated, saw new capital requirements take effect this month. The three levels of capital required, to be held in cash or a defined equivalent, must be the maximum of:
– $A150,000;
– 50bps of funds under management up to a cap of $A5 million
– 10 per cent of average RE revenue with no cap.
There are about 540 ASIC-regulated REs in Australia, which will make up the bulk of the potential customers for the fund.
One of the founders, Steve Berichon, who has worked with Macquarie, UBS and JP Morgan in product development roles, primarily in alternative assets, says one of the traditional sources of this sort of funding for regulated bodies has been bank guarantees. Under Basel III requirements, bank guarantees will be more difficult to obtain and more expensive.
The regulatory capital fund, which is using ME Bank as its safe-keeping deposit bank, charges the RE a facility fee for utilising the deposit on its balance sheet. The fund keeps the interest earned on the bank deposit. Berichon says investors in the fund can expect a return of the cash rate (currently 3.25 per cent) plus about 5 per cent as return. He says this style of funding was an area investment and corporate banks pursued aggressively prior to the GFC, but with constrained funding themselves, it has left the space open for wholesale investors to participate.
As an investment, the fund has similar portfolio characteristics to corporate debt but is a little different in that the corporation, the RE, cannot use the funds in its business. It also requires specialist knowledge for due diligence and ongoing management.
Berichon believes that, longer term, corporate lending will shift away from the major Australian banks because of Basel III, bringing our economy into line with other developed countries such as the US. This style of specialized funding is available in the US through mezzanine lenders and other providers that provide a much broader spectrum of corporate lending facilities than Australia currently enjoys.
Shareholders in Regulatory Capital Management are Berichon, the CIO Alan Darwin, and two RE operators Chris Hipken and Don Worland. Darwin is a lawyer who spent several years with ASIC before joining broker Ord Minnett and then JP Morgan, working with Berichon on product development.
