There are high hopes for the new European Long-Term Investment Fund. Here’s what you need to know.
The European Long-Term Investment Fund (ELTIF) was introduced in 2015 as a way to channel private money into long-term projects and the economy. It had a slow start, but the new iteration may increase its appeal to investors. In this post we examine what ELTIFs are, the applicable regulations, who can invest in them, and what’s new with the coming 2.0 version.
The ELTIF was designed to give general partners (GPs) another regulated path to pan-European investors, and offer investors secure access to non-traditional asset classes. The European Long-Term Investment Fund would diversify portfolios, and because it was long-term by design, would help protect investors against short-term market volatility.
That was the theory. When GPs began to examine the new fund in greater detail, however, they found a vehicle that was restrictive and complicated. The original ELTIF was considered overregulated. For example, there was a requirement to set up local facilities in each state where an ELTIF was marketed, adding cost and complexity for funds. As a result, adoption has been disappointing.
EU regulators have taken this into consideration and the result is ELTIF 2.0. There are high hopes for this updated fund structure, which comes into effect in early January 2024.
What is an ELTIF?
ELTIFs are European Alternative Investment Funds (AIFs), authorized under the Alternative Investment Fund Managers Directive (AIFMD).
In that respect, these funds are just like other alternative onshore EU funds. Any AIF domiciled in popular jurisdictions, such as Ireland and Luxembourg, will fall under AIFMD rules, and ELTIFs are no exception. While AIFMD compliance adds cost and complexity to fund management, it has one major advantage in terms of attracting investors.
These funds are eligible for the EU passporting scheme. That means they can be marketed across the EU without having to comply with separate national marketing rules. But that’s not all. ELTIF is unique in allowing GPs to use the passporting scheme to target both professional and retail investors. Passporting is usually only available to funds targeting professional investors.
ELTIF’s strength is also its weakness
Retail and professional investors are very different. The issue for ELTIF 1.0 was that having allowed funds to target retail investors via the marketing passport, regulators correctly felt a duty to protect them.
To do that, they limited the types of assets ELTIF funds could invest in, applied restrictive diversification and investment limits, and created a series of prohibitive rules around retail investor involvement.
This meant retail investors found ELTIFs difficult to access, and funds struggled to structure them in a way that would appeal to professional investors. As a result, ELTIF 1.0 had limited appeal.
What’s new with ELTIF 2.0?
The amendments to the European Long-Term Investment Funds regulation, known as ELTIF 2.0, aim to address these issues and make the fund more appealing as a vehicle for investors and fund managers.
ELTIF 2.0 upgrades ELTIF in five main ways:
- It allows ELTIF funds to invest in a broader range of assets. Specifically, it removes mention of “European long-term projects”, bringing overseas investments into scope. The definition of “real assets” has also been extended to include all assets that have “intrinsic value due to substance and properties”.
- Funds are required to invest at least 55% of capital in eligible investments (in ELTIF-compliant assets such as infrastructure, real estate, private equity, etc.). But that’s down from 70% with ELTIF 1.0. The minimum permitted investment in a real asset threshold has been reduced from €10 million to €1 million, making real assets more accessible.
- In terms of borrowing, ELTIF 1.0 set a limit of 30% of the value of the fund. That limit has now been increased to 50% where the ELTIF is marketed to retail investors and 100% where it is marketed to professional investors.
- Several barriers to retail investment have been removed, including a requirement for managers to carry out suitability assessments and the requirement to set up local facilities wherever an ELTIF was marketed.
- The possibility of an early exit has now been added to ELTIF regulations. Previously there was none.
There are a number of other regulations, but the thrust of the changes is towards making ELTIFs simpler to structure and manage, and more appealing to both professional and retail investors.
Will they work? Time will tell, but the fund industry has reacted positively to ELTIF 2.0 so far. In January, we’ll see whether that enthusiasm is matched by action.
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