Amendments to the regulatory framework for European long-term investment funds (“ELTIF”) framework, also known as “ELTIF 2.0”, will apply from January 2024. ELTIF 2.0 is a promising framework for fund managers wishing to facilitate retail investors with long-term investment goals. AFME, in welcoming ELTIF 2.0, noted that “The revamped regime now has the potential to become an attractive “go-to” fund structure for long-term investments, with particularly beneficial improvements for retail investors”.
ELTIFs are EU alternative investment funds (“AIFs”), managed by alternative investment fund managers (“AIFMs”), that invest in long-term investments, such as social and transport infrastructure projects, real estate and SMEs.
The original ELTIF framework was adopted in 2015 and is laid down in Regulation (EU) 2015/760 (the “ELTIF Regulation”) which establishes uniform rules for the authorisation, investment policies and operating conditions and marketing of ELTIFs.
ELTIFs are the only type of funds dedicated to long-term investments that can be distributed on a cross-border basis to both professional and retail investors. However, since the adoption of the ELTIF framework in 2015 only a few ELTIFs have been launched. The European Commission (the “Commission”) launched a public consultation to understand the reasons behind the slow uptake in ELTIFs. Based on this consultation, the Commission noted that fund managers broadly agreed that the key deficiencies of ELTIFs lay in the limited scope of eligible assets and investments, as well as the barriers investors faced in accessing ELTIFs.
On this basis, the Commission proposed revisions to the ELTIF framework in the form of an amending Regulation on 25 November 2021. This amending Regulation entered into force on 9 April 2023 and will apply from 10 January 2024 (here).
Key Aspects of ELTIF 2.0
ELTIF 2.0 introduces a number of welcome targeted changes to the ELTIF framework, including:
Expansion of the scope of eligible assets and investments
ELTIF 2.0 significantly expands the scope of eligible assets and investments which an ELTIF can invest in to improve the attractiveness of the framework.
For example, ELTIF 2.0 aims to enhance the flexibility of asset managers to invest in broad categories of real assets by introducing “real assets” as a specific “eligible investment”. Such real assets include immovable property, such as communication, environment, energy or transport infrastructure, social infrastructure, including retirement homes or hospitals, as well as infrastructure for education, health and welfare support or industrial facilities, installations, and other assets, including intellectual property, vessels, equipment, machinery, aircraft or rolling stock.
ELTIF 2.0 also removes the minimum investment value of €10 million or its equivalent in real assets.
ELTIF 2.0 increases the market capitalisation threshold for qualifying portfolio undertakings ("QPUs") which are listed (from €500 million to €1.5 billion).
It includes the possibility to invest in FinTech assets, subject to certain conditions.
Crucially, for non-EU managers, the new regime includes the possibility to invest in non-EU QPUs. Note however, non-EU QPUs in jurisdictions identified as high-risk for anti-money laundering or listed on the EU list of non-cooperative jurisdictions for tax purposes are prohibited.
ELTIF 2.0 also provides that ELTIFs may enter into minority co-investment in investment opportunities, invest in simple, transparent and standardised securitisations. Furthermore, it permits fund of fund strategies by removing the previous 20% limit of investment in underlying funds and allows ELTIFs to invest in EU AIFs and UCITS - in addition to ELTIFs, EuVECAs and EuSEFs - managed by EU AIFMs, provided those ELTIFs, EuVECAs, EuSEFs¸ UCITS and EU AIFs invest in eligible investments.
ELTIF 2.0 also permits master-feeder ELTIFs, provided both are ELTIFs, i.e. one ELTIF invests at least 85% of its assets into another ELTIF. The requirements are now more closely aligned to the general requirements for master-feeder AIFs within the meaning of the AIFMD.
Portfolio composition and diversification requirements
Under the current framework, ELTIFs are required to invest at least 70% of their capital in eligible investment assets, this requirement is lowered in ELTIF 2.0 to 55% with the aim of better enabling managers to manage liquidity of ELTIFs.
It has been noted that the existing diversification requirements have proven to be too burdensome because in practice they mean that ELTIFs are, on average, required to make 10 distinct investments which can be difficult to achieve, and costly in terms of transactional costs and capital allocation. ELTIF 2.0 adjusts the diversification requirements for ELTIFs’ exposures to single qualifying portfolio undertakings, single real assets, collective investment undertakings and certain other eligible investment assets, contracts and financial instruments. This adjustment is aimed at reducing transaction and administrative costs for ELTIFs and will allow managers to pursue more concentrated investment strategies with a view to having exposures to fewer eligible assets. ELTIF 2.0 also provides that those investment limits will not apply where ELTIFs are marketed solely to professional investors and also allows for 100% investment in a feeder ELTIF. Other changes to the diversification requirements include the following:-
- Increasing the general diversification requirements for each of the following from 10% of an ELTIF’s capital to 20%:
- instruments issued by / loans granted to any single QPU;
- any single real asset; and
- units or shares of any single ELTIF, EuVECA, EuSEF, UCITS or EU AIF managed by an EU AIFM (this is not applicable to feeder ELTIFs).
- Increasing the general diversification requirements for each of the following from 5% of an ELTIF's capital to 10%:
- any UCITS eligible asset issued by one single body; and
- the risk exposure to any counterparty with respect to over-the-counter derivative transactions, repurchase agreements or reverse repurchase agreements.
- Up to 20% of an ELTIF’s capital may now be invested in STS.
Furthermore, the diversification rules referred to above do not apply to ELTIFs reserved solely to professional investors.
Borrowing of cash
The existing framework restricts the borrowing of cash to 30% of the value of the capital of an ELTIF which limits a manager’s ability to successfully pursue certain investment strategies. ELTIF 2.0 is intended to increase the flexibility of managers to raise further capital during the life of an ELTIF. Firstly, ELTIF 2.0 replaces the concept of “capital” with “net asset value” as the point of reference for determining the borrowing of cash limit. Secondly, ELTIF 2.0 provides that ELTIFs marketed to retail investors should be permitted to borrow cash of up to 50% of the net asset value of the ELTIF. ELTIFs marketed solely to professional investors will be permitted to borrow up to 100% of the net asset value of the ELTIF.
Retail investors – removal of the minimum €10,000 investment threshold
Crucially, ELTIF 2.0 removes the requirement (a) that retail investors invest an initial minimum investment in one or more ELTIFs of €10,000 and (b) that such investors may not invest an aggregate amount exceeding 10% of their financial instrument portfolio in ELTIFs. It was noted that when applied together, these requirements created a significant obstacle to investments in ELTIFs for retail investors, which conflicted with the goal of ELTIFs to establish a retail alternative investment fund product. These changes, together with the removal of the local facilities requirement and other complementary amendments, are significant enhancements which advance the efficient and effective use of the 'retail-distribution' passport and allow for efficient and effective access by retail investors to this private fund product.
Regulatory Technical Standards
On 23 May 2023, the Commission consulted on regulatory technical standards (“RTS”) underpinning ELTIF 2.0 (here). The RTS will specify the detailed application of ELTIF 2.0. In its consultation on the RTS, the Commission is seeking views, in particular, on redemption policies, matching mechanisms and costs disclosures for ELTIFs.
Comments can be made on the draft RTS until 24 August 2023 and it is expected that the final RTS will apply at the same time as ELTIF 2.0, that is 10 January 2024.
While ELTIF 2.0 will apply from 10 January 2024, there are grandfathering provisions in place including a grandfathering provision for ELTIFs authorised in accordance with and complying with the provisions of the existing framework before 10 January 2024 for a period of 5 years.
The Commission notes that compared to AIFs, the ELTIF framework has a number of advantages, including providing:
- a fully harmonised European label for financial products, which allows for an EU-wide, passport-based distribution to both professional and retail investors;
- providing capacity, in some instances, to withstand market volatility due to an ELTIF’s closed-ended nature and long-term orientation; and
- ELTIFs can also represent a safer pathway for investors interested in private equity investments but present a lower risk profile than pure private equity funds.
On this basis, the revisions to the ELTIF framework are to be welcomed and will provide scope and opportunities for fund managers to present an attractive new product to retail clients, in particular, with long-term investment strategies.