On 20 April 2015, the European Council adopted the proposed Regulation on European Long-Term Investment Funds (ELTIFs). The Regulation will enter into force on the twentieth day following its publication in the Official Journal. ELTIFs could be available in Member States as early as Q3/Q4 in 2015.
Background to ELTIFs
ELTIFs form part of the EU Commission’s proposals for a Capital Markets Union. The Commission sees the Capital Markets Union as an initiative to encourage growth in the European economy by unlocking investment in Europe’s companies and infrastructure.
The Commission believes that compared to other parts of the world, European businesses remain heavily reliant on banks for funding and relatively less on capital markets. Stronger capital markets would complement banks as a source of financing, and would unlock more investment for all companies, especially SMEs, and for infrastructure projects, attract more investment into the EU from the rest of the world, and make the financial system more stable by opening up a wider range of funding sources.
The Commission believes that there is a significant task in linking investors and savers with growth. Compared with the US, US medium-sized companies receive five times more funding from capital markets than they do in the EU. The target is to achieve a fully functioning capital markets union by 2019. This includes supporting the take up of new European long term investment funds to channel investment in infrastructure and other long term projects.
ELTIFs are vehicles designed to boost non-bank investment in the real economy across Europe. They are intended to help pension funds, insurance companies, professional and even retail investors willing to invest at least €10,000 over the long term in one or more ELTIFs to put money into projects in their own countries or elsewhere, provided these projects benefit the EU economy: be it infrastructure, machinery or equipment, education, research or fostering the growth of SMEs.
The Commission’s aim is that the ELTIF will become a new European brand, similar to the UCITS, which investors will associate with product level protection. It envisages that small to medium size investors who might not be able dictate and negotiate terms will take comfort from that protection.
Overview of ELTIFs
- ELTIFS are:
- closed-ended, with limited redemptions available for retail investors.
- subject to The Alternative Investment Fund Managers Directive.
- ELTIFs must:
- be authorised by relevant EU regulator.
- be EU alternative investment funds.
- have an EU alternative investment fund manager appointed.
- appoint a depositary.
- invest at least 70% of assets in eligible long term investments.
- ELTIFs may:
- be listed.
- invest up to 30% of assets in transferable securities.
- borrow up to 30% of NAV.
- enter into derivatives for hedging purposes only.
Our previous briefing on the proposed Regulation sets out details of:
- the conditions for authorisation;
- what ELTIFs can invest in;
- the closed-ended nature of the ELTIF;
- the transparency requirements; and
- the marketing rules and the eligible investment policies.
The Parliament and Council, broadly, adopted the draft Regulation as proposed. The Parliament did, however, insert provisions to ensure that ELTIFs are not invested in speculative assets and that any retail investors putting money in them are properly informed and protected. In addition, to protect retail investors in particular, there are additional limited “redemption” rules that would enable an ELTIF that has enough liquid assets to return an investor’s money at the investor’s request.
As set out above, ELTIFs could be available in Member States as early as Q3/Q4 in 2015. Whilst the Regulation will have direct effect in Member States so that separate implementing legislation is not required, there is still some uncertainty in key areas.
It is not clear how much uptake there will be for ELTIFs when fund managers can operate identical strategies in existing alternative investment funds. This is likely to depend on a number of factors, including:
- Whether the Commission is correct in believing that there will be investor demand for a new fund brand that offers product level protection for investment in illiquids.
- ELTIFS, being AIFs, can take any legal form except that ELTIFs for sale to the retail market cannot be structured as a partnership. It will be key to identify structures that will be both tax efficient and eligible for authorisation as an ELTIF. In the UK, the available structures are likely to include limited partnerships (for the professional market) and investment trusts (for the professional and retail market). Managers will need to consider how the Regulation fits into other regulatory rules (e.g. the Prospectus Rules and Listing Rules).
- Whether the European Investment Bank will set aside funds for investment in ELTIFs. This is currently unclear, but if this happens then managers would likely establish ELTIFs to access those funds.