The attendance of Commissioner Hill at the third and final political trialogue on the proposed European Long-Term Investment Funds (ELTIF) Regulation is a clear indication of the top-level commitment within the Commission to the growth agenda. Although launched under the previous Presidency, this proposal has also been cited as an early action under the “Capital Markets Union” banner because its aim is to encourage a wider range of sources to finance the European economy and to reduce the reliance on bank related funding.
ELTIFs are EU alternative investment funds (AIF) with EU Managers authorized under and compliant with all the requirements of the AIFMD. It is an optional regime – managers can decide whether or not to seek authorization of an eligible AIF as an ELTIF and thereafter use the label for marketing purposes.
ELTIFs must be at least 70%-invested in eligible assets and are subject to diversification requirements based on the UCITS regime but with higher limits.
The range of eligible assets is very wide. As well as unlisted small and medium enterprises (SME) and infrastructure projects, ELTIFs can invest in real estate (where it is integral to a long-term project or company and the investments are “smart, sustainable and long-term”), intellectual property (such as patents) and listed SMEs with a market capitalization of no more than €500 million. The use of derivatives and borrowing is restricted. A Parliamentary proposal that an ELTIF must have a minimum percentage invested within the EU was dropped.
ELTIFs are closed-ended and of defined life. They may distribute net income and capital gains, but not original capital investments. However, when designing an ELTIF, the manager may decide to offer an early redemption option. Where this is the case, early redemptions can be requested only after a set period (the shorter of five years of half the defined life of the ELTIF) and only up to a maximum of 30% of the fund (the most that an ELTIF can invest in liquid, ineligible assets).
The AIFMD already allows funds such as ELTIFs to be marketed on a cross border basis to professional investors. ELTIFs may also be marketed cross-border to “semi-professional investors” and to other retail investors with investible portfolios of at least €100,000 provided they invest no more than 10% of their portfolio into ELTIFs. Semi-professional investors are defined as for the European Social Entrepreneurship and Venture Capital Fund regimes – they commit to invest a minimum of €100,000 and state in writing that they understand the risks associated with the investment.
Therefore, ELTIFs are open to high net worth clients or to those who have accumulated a portfolio of more than €100,000, in a pension plan, for example. This will enable new monies to be invested into such assets by smaller institutions and by high net-worth and “mass affluent” investors.
ELTIFs are also an EU export opportunity, with interest reported from non-EU investors.
Fund managers can now take decisions about whether they wish to adopt the ELTIF label for any existing investment vehicles or to launch new ones.
The industry needs to work with national regulators and fiscal authorities to ensure that the ELTIF regime is transposed into and accommodated within national regulatory and fiscal laws so that ELTIFs stand the greatest chance of success.