European long term investment funds (ELTIF) 2.0: A new era for Private Funds Sponsors?
02 August 2023
02 August 2023
An overview of the key changes to the ELTIF Regulation
Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (the ELTIF Regulation) was aimed at boosting European long-term investments (ELTIFs) in the real economy, as long-term finance has been identified as rucial in putting the European economy on a path towards smart, sustainable and inclusive growth.
However, since the adoption of the ELTIF Regulation, very few ELTIFs have been authorised and they have not evolved as expected, despite the EU’s desire to promote long-term finance.
As a result, the European Commission (the Commission) has committed to review the ELTIF Regulation. On 15 February 2023, the Council of Europe, the Economic and Social Committee and the Commission reached a political agreement, which has been adopted on first reading by the European Parliament. The ELTIF Regulation was then amended by Regulation (EU) 2023/606 of the European Parliament and of the Council of 15 March 2023 as regards the requirements pertaining to the investment policies and operating conditions of European long-term investment funds and the scope of eligible assets, the portfolio composition and diversification requirements and the borrowing of cash and other fund rules (the Updated Regulation), which was published in the Official Journal of the EU on 20 March 2023.
This article highlights the Updated Regulation’s key changes to the ELTIF Regulation:
Some of the core changes introduced by the Updated Regulation come from the broadening of the eligible assets scope, fund structures and applicable thresholds. These changes are summarised below:
Additions and clarifications
(a) The Updated Regulation has included the following as eligible assets for ELTIFs:
(i) simple, transparent and standardised securitisations (to promote ELTIF investments in securitised assets);
(ii) green bonds (to encourage the trend towards private capital flows within more environmentally sustainable investments); and
(iii) “real assets” are now redefined as assets that have an “intrinsic value due to their substance and properties”.
(b) As part of broadening the scope of eligible assets, the Updated Regulation has improved the definition of “qualifying portfolio undertaking” (ie the issuer of the eligible assets) by:
(i) including newly authorised or registered financial undertakings aimed at bolstering innovation by favouring investments in FinTechs (though the definition is broad in referring to a five-year period between registration/authorisation of the financial undertaking and the ELTIF’s initial investment in such financial undertaking);
(ii) increasing the market capitalisation (from €500 million to €1.5 billion) with respect to undertakings admitted to trading on a regulated market or on a multilateral trading facility; and
(iii) amending the framework surrounding investments located in a third country.
The Updated Regulation further provides for (i) more options in terms of fund-of-funds strategies (by including UCITS and EU AIFs managed by EU AIFMs as potential investments, the Commission shows it is conscious of the benefit that fund-of-funds strategies can offer in terms of exposure to illiquid assets) and (ii) master feeder structures (though limited to feeder ELTIFs investing in master ELTIFs only).
First of all, the Updated Regulation has lowered the threshold for capital that an ELTIF can invest in eligible assets from 70% to 55% (thereby increasing the threshold for potential investment in other assets from 30% to 45%). In addition, the threshold for investment in (i) a single real asset, (ii) instruments issued by (or loans granted to) a single qualifying portfolio undertaking and (iii) units/shares of any single ELTIF/EuVECA/EuSEF/UCITS/ EU AIF has been increased from 10% to 20% (with an increase from 5% to 10% for UCITS-type assets, when issued by a single body).
Some amendments have also been introduced to increase the attractiveness of ELTIFs to both retail and professional investors.
The Updated Regulation has removed the restrictions relating to (i) minimum initial investment (€10,000) for retail investors and (ii) the disposal of a financial portfolio (not more than 10% for a portfolio of €500,000 or less).
In addition, a suitability assessment and related statement of suitability (in line with MiFID II) have been put in place, together with a clear written alert to be issued to retail investors under certain circumstances (though these requirements do not apply where the retail investor is a member of senior staff, or a portfolio manager, or director, officer, agent or employee of the manager of the ELTIF, or of an affiliate of the manager of the ELTIF, who has sufficient knowledge about the ELTIF).
In order for ELTIFs to remain attractive to professional investors, the Updated Regulation clearly states that the investment and concentration limits do not apply to, and borrowing limits are higher for, ELTIFs solely marketed to professional investors.
The redemption provisions and liquidity profile have also been amended as part of the ambition to upscale the use of ELTIFs, as follows:
a) In relation to redemptions, a minimum holding period (which may also refer to the life of the ELTIF) has been introduced, though the length of such period is not specified;
b) in relation to borrowing, a 30% limit based on the capital of the ELTIF has been replaced with a 50% limit based on the net asset value of the ELTIF with respect retail investors, and with a 100% limit based on the net asset value of the ELTIF for ELTIFs that are marketed to professional investors only; and
c) in relation to secondary trading of ELTIF units or shares, the option has been introduced to organise, under certain conditions, a full or partial matching of transfer requests by exiting investors with transfer requests by potential investors.
In addition to the above, the following amendments are worth mentioning:
a) ELTIF register – the Updated Regulation now requires a list of specific information to be kept up to date in the ELTIF register held by ESMA;
b) Preferential treatment – the Updated Regulation specifies that preferential treatment among ELTIF’s retail investors is based on classes of shares/units;
c) Local facilities – the obligation to provide facilities in the Member State where the ELTIF is intended to be distributed has been removed; and
d) Sustainability of ELTIFs – the Updated Regulation specifically provides for an assessment to be undertaken in relation to an ELTIF labelled “environmentally sustainable/green”, regardless of whether a general obligation of the principle of “do no significant harm” should apply to ELTIFs and ELTIFs’ place within the objectives of the European Green Deal.
The Updated Regulation entered into force on 9 April 2023 and will apply from 10 January 2024 onwards.
A transitional period of five years (until 11 January 2029) has been implemented for ELTIFs authorised under and in compliance with the ELTIF Regulation before 10 January 2024 (except that ELTIFs which are authorised under the ELTIF Regulation before 10 January 2024 and which do not raise additional capital do not need to comply with the Updated Regulation). Finally, it is important to note that any ELTIFs authorised before 10 January 2024 can opt in, and be subject, to the Updated Regulation.
At first glance, one can only be happy and enthusiastic about the Updated Regulation’s boosting and reshaping of the ELTIF Regulation, which wisely enough is based on existing ELTIF foundations and takes into account the market pressure for solutions that align private markets strategies to retail investors, while also ensuring that ELTIFs remain attractive to professional investors.
In this respect, any private fund sponsors will not only be seduced by the Updated Regulation itself, but also (and potentially more importantly) by the structuring possibilities it brings to (existing) investment strategies, which will broaden the investor base.
The next key milestone is the Updated Regulation’s implementation and beyond – when we will see the real extent of progress and whether there is a real prospect of a genuine ELTIF 2.0.
Authors: Antonios Nezeritis, Partner; Arnaud Julien, Partner; Marc Hirtz, Counsel; Amina-Nadège Guelaoui, Junior Associate