Since the turn of the millennium, there has been an increase in the variety and use of capital structures of a company. Under the well-known and widely accepted Modigliani and Miller theorem ("M-M theorem"), regulators would be able to achieve any particularly desirable mix of debt and equity in banks at negligible cost, since leverage (banks' debt: equity ratio) would then be irrelevant to lending and its pricing1. Although it is proposed by the M-M theorem that the capital structure of a company2, i.e. how the combination of debt and equity is managed, is irrelevant for the value of the firm, this classical theorem has been challenged by many other theorems, such as the 'trade-off' theory, the 'agency costs' theory, and 'pecking-order' theory (Ferran, pp. 54-56)3.
Alternative investment vehicles have recently been more popular, especially in terms of the private equity and the leveraged finance markets, notably after the rather abrupt entrenchment in the marketplace due to the credit crunch of the 2007-2008 crises (Yates & Hinchliffe, p.170)4. This increase in popularity gave rise to a need in the regulation of the alternative investment market, especially in terms of private equity investments. Particularly, during the last decade, fast changes in the global economic environment triggered asset management to social and economic change. In the meantime, the lack of stability in long-term investment returns increased the need for sustainable long-term investment returns and the attention paid to alternative asset management5.
Overview of the Concept of Alternative Investment
Investment funds are specially formed investment vehicles, created only with the purpose of gathering assets from investors, and investing those assets in a diversified pool of assets. Such investment in investment funds provides small investors with the opportunity of exposure to a professionally-managed and diversified range of financial or other assets.
Before the explanation regarding the alternative investment concept, please note that since its introduction in 1985, an undertaking for collective investments in the transferable securities ("UCITS") fund has evolved into a European brand with international recognition, especially after its regulation at the European level. The final directive on UCITS, i.e. Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities adopted on 23 July 2014 ("UCITS Directive") has offered European investors a wide range of high quality and safe investment products. UCITS funds gained popularity, not only in Europe, but also in South America and Asia among investors preferring not to invest in a single limited public company, but rather to invest in diversified unit trusts, spread out within the European Union ("EU")6.
In contrast to the UCITS, the term "alternative investment funds" ("AIF") corresponds to all investment funds that are not already covered by the UCITS Directive. This includes hedge funds, funds of hedge funds, venture capital, and private equity funds and real estate funds.
Overview of the Concept of Private Equity as a Type of Alternative Investment
"Private equity" could be broadly defined as investment in...