The European Long-term Investment Fund (“ELTIF”) is a new type of regulated fund to facilitate retail and institutional investment in projects that require long-term capital (for instance, infrastructure, real estate, transport, energy). Following the publication of the ELTIF regulation in the Official Journal of the EU earlier this week, ELTIFs will be available from 9 December 2015. The intention of this new investment framework, as originally set out in the European Commission’s 2013 proposal, is to create a single market in the EU for a long-term investment fund, as well as to contribute to the financing of the European economy.
In our view, ELTIFs will be of interest to fund managers who want to access the retail market on a cross-border basis. On the investor side, we expect ELTIFs to appeal mostly to HNWIs and the affluent retail market. Also, as a ‘branded’ product with the hallmarks of investor protection, to local government pension schemes. Although ELTIFs are still an option for fund managers targeting ‘professional investors’ only, additional requirements of the ELTIF regime may mean that these managers decide to stick with existing investment products.
Key features of ELTIFs
A variety of requirements must be met to qualify as an ELTIF; some of the key ones are summarised below.
An ELTIF can take any legal form, although it has to be a closed-ended EU AIF managed by an EU AIFM under the Alternative Investment Fund Managers Directive (“AIFMD”). Redemption can be offered at the manager’s discretion, from 5 years into the life of the ELTIF, or half way through its life (whichever is earlier) and subject to liquidity requirements, redemption limits and fair treatment of investors. However, we would expect that exit opportunities are most likely to be from the secondary market, including the trading of interests in listed ELTIFs.
At least 70% of an ELTIF’s capital must be invested in ‘eligible assets’ which includes debt and equity investment in, and loans to, most unlisted and small listed companies. Fund investments can only be in other ELTIFs, European Venture Capital Funds (EuVECAs) and European Social Entrepreneurship Funds (EuSEFs), and up to a maximum of 20% of an ELTIF’s capital. Commercial real estate investment has to be more than €10m in value and contribute to sustainable and inclusive growth in Europe (i.e. no speculative development).
There are also diversification requirements: an ELTIF can only invest 10% of its capital in a single real asset; however this can be raised to 20% provided the aggregate value of the assets held by the ELTIF in individual real assets exceeding 10% do not exceed 40% of the value of the ELTIF capital.
Leverage limits are low: broadly, an ELTIF’s borrowing cannot represent more than 30% of its capital.
Marketing to retail investors
The regulation sets outs additional obligations for fund managers marketing an ELTIF to retail investors (i.e. those who are not ‘professional investors’), some of which are set out below.
- Managers will have to produce a key information document (KID), as well as a prospectus.
- In addition to their AIFMD authorisation, managers will need to have permission from their regulator to provide the additional services permitted under article 6(4) of the AIFMD and carry out an assessment on the “suitability” of the ELTIF for retail investors (all of whom will need to receive appropriate investment advice from either the manager or a distributor before they invest).
- Managers will have to ensure that retail investors with assets to invest of less than €500,000 make an initial minimum investment in one or more ELTIFs of €10,000, but do not invest more than 10% of their assets in ELTIFs.
- The depositary will need to be a bank depositary, in the same way as for UCITS funds.
- Managers will have to put in place facilities for making subscriptions, payments or redemptions in each member state where it intends to market.
Although the the expectation is that there will be a strong political commitment for ELTIFs to be tax efficient, tax transparent and appeal to tax exempt investors, their tax treatment is yet to be clarified.
The ELTIF regulation does not allow any gold-plating. This uniformity of treatment is welcomed, particularly in the wake of the differing rules and interpretations of member states in their implementation of the marketing requirements under AIFMD.
ELTIFs are flagged as an early policy priority in the European Commission’s Green Paper on Building a Capital Markets Union. The paper also welcomes views on any further support that can be given to encourage their take up.