Regulation and investor protection in Private Capital

Basically, they ensure investor protection. They ensure that the standards, which are sophisticated standards that have been very will designed and are a product of many years of experience, are really applied. It is very important to monitor that those standards are applied.

From the point of view of the financial systems' evolution, Private Capital is one of the major developments in the last 20-30 years. It includes different versions, such as risk capital itself, the so-called seed capital, investments made purely in non-public companies (even if they are not companies in the stage of inception or initial development), etc.

It refers to the activity of professionals that manage funds that invest in unlisted companies.

This type of investment is seen as particularly risky by the regulation and the Securities Market's supervision or as an investment in which special prevention must be observed, especially due to the liquidity. While investment funds that invest in listed companies or directly in listed stocks directly are considered liquid investments, investing in private capital involves assuming that the investment will need time to mature before being liquidated in good conditions.

The type of companies in which private capital funds invest are companies that are less exposed in terms of information and transparency, although private capital management companies make a great effort to identify suitable companies, monitor them and somehow carry out that function that is performed in the public market due to the information available to all.

MiFID is a regulatory package that has gone through various stages. The current version is the so-called MiFID II, which was a step forward in the investor protection techniques established at the beginning of the millennium (2003/2004) with MiFID I. Precisely, if MiFID II emphasised on a particular aspect, it was on the investors' education. Obviously, it also stressed that investors should be offered the appropriate products and that the entities should have information about their knowledge and experience and, in certain cases, their objectives and financial situation when selling them products.

Another aspect was requiring entities to provide adequate training to the staff selling the products and, in general, that special attention was given to financial education.

Thanks to this regulation, investors are well protected, but investing always entails risk, and it must be carried out in a diversified way and knowing the risks, such as the illiquidity risk, which is particularly marked in the scope of private capital.

There has recently been a regulatory change, which has in some way democratised investment in private capital, making it available with precautions. Until recently, this type of product could only be acquired by professional investors, a category that has been defined with a considerable degree of rigour, or investors who were able to invest at least €100,000, so the investments in this type of product could not be concentrated in small investors, but in investors that could assume these risks.

The new regulation, which I supported, has sought to democratise private capital but with precautions. The precautions are the following: the investment must be made under the recommendation of a professional (with advice), and it must be an investment of at least €10,000, but this investment cannot represent more than 10% of the investor's assets. There are limits in relation to the customer's financial net worth and the precaution of having to receive advice: an entity that assesses their knowledge, experience and financial situation and that has given green light to investing.

They are not risky products per se, because the management companies involved in this type of fund are very professional people who try to identify good opportunities and safe investments. But above all, the liquidity factor requires these investments to be considered with special caution and studied in depth.

In the end, the principles of prudent investment are always the same: diversify, pay attention to the products in which you invest, understand them and allow yourself to be advised by professionals.  I believe that with the current regulatory framework, investing in private capital is perfectly reasonable if complying with these principles.

This content is merely indicative. This video is merely financial training offered to you by Crescenta, without the intention of giving any type of personalised investment recommendation.

It is neither any type of advertising of financial instruments nor a recommendation or purchase offer.