Preamble
On 25 November 2021, the European Commission published a proposal for a regulation amending the Regulation (EU) 2015/760 on European Long Term Investment Funds (“ELTIF”) aiming at making the ELTIF regime more attractive. Launched in 2015, the ELTIF regime has so far not reached the intended success. As of October 2021, only 57 ELTIFs have been set up in the European Union, representing a mere EUR 2.4 billion of assets under management. Without minimizing the operational issues that can impact the launch of an ELTIF (e.g. the need to have an appropriate distribution network when the ELTIF is marketed to retail investors) and that are not due to the ELTIF regulation, the current ELTIF regulation has been criticized for, among other things, its lack of pragmatism or feasibility when it comes to eligible assets, its diversification and concentration requirements that are considered as being too stringent and the barriers it was imposing for marketing these products to retail investors. While the proposal is not tackling all the issues, it’s an important step in making ELTIF a more successful regime, accompanying the increased market pick up of that framework over the last two years.
1. Broadening the scope of eligible assets
Among the main improvements for initiators of ELTIFs, we can highlight the broader scope of eligible real assets, the exposure to securitisations and the investment in target funds.
The proposal is bringing several constructive changes:
- the reference to the European nature of the long-term investment will be removed lifting an uncertainty on the possibility to have assets that are located outside of the European Union.
- the definition of “real assets” has been simplified to include any assets that have intrinsic value due to their substance and properties. Assets without investment returns, predicable cash flow and rights attached to or associated with real assets will therefore become eligible to ELTIFs, i.e. social, communication, environment, energy or transport infrastructure, as well as education, health, welfare support or industrial facilities or installations.
- ELTIFs will be allowed to invest in securitization that falls within the scope of the simple, transparent and standardised securitizations (“STS”) governed by the Regulation (EU) 2017/2402, provided that the underlying assets of these STS consist in commercial, residential, corporate loans or trade receivables.
- Target funds: Beside other ELTIFs, EuVECAs and EuSEFS, ELTIFS will be authorised to invest in UCITS or other EU AIFs managed by EU AIFM, provided that these AIFs are investing in eligible investments for ELTIFs, allowing therefore ELTIFs to deploy fund of funds strategies. For the purpose of the ELTIF diversification requirements described below, it should be noted nevertheless that the ELTIFs investing in other AIFs will have to perform a look-through approach, by combining the assets directly held by the ELTIFs with the assets by these AIFs. This will require appropriate cooperation and transparency to be put in place between the ELTIFs and the target funds. Furthermore, it should be noted that the target funds shall not invest more than 10% of their assets in any other collective investment undertakings.
- Also, it will be possible to have ELTIFs structured as master-feeder, with a feeder ELTIF being an ELTIF that invests at least 85% of its assets in another ELTIF. If a Retail ELTIF qualifies as a feeder ELTIF, it will be subject to disclosure requirements and cooperation requirements between the manager of the feeder ELTIF and the manager of the master ELTIF, as well as their depositaries, that are close to the one applicable to UCITS.
- ELTIFs will be allowed to make minority co-investments, which should attract more modest promotors of investment projects, rather than be required to invest via or in majority owned subsidiaries as it is the case now.
- The minimum value of real assets that an ELTIF can invest in will be decreased to EUR 1 million, broadening significantly the range of target real assets, and it will no longer be required that real assets are owned directly or via indirect holding via qualifying portfolio undertakings;
- Concerning the investment in listed qualifying portfolio undertakings, the maximum market capitalisation threshold will be increased from EUR 500 million to EUR 1 billion and it will be specified that such threshold is only to be met at the time of the initial investment;
- It will be also now clearly possible for an ELTIF manager, its affiliated entities and staff to invest in that ELTIF and in its assets, allowing for alignment of interests mechanisms, provided that the ELTIF manager has put in place organisation and administrative arrangements to identify, prevent, manage and monitor conflicts of interest and provided that such conflicts of interest are adequately disclosed.
2. Creation of 2 categories of ELTIF and bringing more flexibility in the diversification and concentration requirements
One of the main innovations of the proposal is to create a differentiated regime between ELTIFs that will be solely marketed to professional investors and ELTIFs that can be sold to retail investors also.
The concept being that retail investors should benefit from a higher level of protection than professional investors. The modifications in the diversification and eligibility requirements are as follows:
In addition to relaxing the diversification and concentration requirements, the borrowing limit will be increased to 50% for Retail ELTIFs and 100% to Professional ELTIFS. The possibility to borrow in a currency of the assets to be acquired will also be introduced (whether for Retail ELTIFs or Professional ELTIFS), provided that the currency risk is hedged or that it can be demonstrated that the borrowing in another currency does not expose the ELTIF to material currency risks. Finally, the encumbrance limit of 30% will be removed (whether for Retail ELTIFs or Professional ELTIFS) and it will be clarified that borrowing that is fully covered by investors’ capital commitments shall not constitute borrowing.
3. Simplifying marketing to retail investors
One of the main goals of the ELTIF Regulation is to attract retail investors to long-term investments. In light of the mitigated result of the current ELTIF Regulation, the following changes will be brought:
- The requirement to have facilities in place in the Member States where the retail investors targeted are located for the purpose of making subscriptions, payments, repurchasing shares and making information available will be lifted.
- The specific requirements to assess the retail investor’s knowledge and experience, his financial situation and his investment objective will be removed and the marketing to retail investors will be aligned with the suitability requirements under MiFID II.
- The requirement that an investor having a financial instrument portfolio of less than EUR 500,000 shall not invest more than 10% of his financial instrument portfolio and ELTIFs and that he invests no less than EUR 10,000 will be removed.
- It will be finally be clarified that the principle of equal treatment only applies at a share class level.
4. Other modifications
Without being exhaustive, the proposal will bring the following modifications:
- An EU authorised AIFM will no longer be subject to the requirement to be approved by the regulator of the ELTIF.
- The possibility for investors to request the winding-up of an ELTIF if their redemption requests have not been satisfied within 1 year from the date on which they were date will be removed.
- The possibility to have liquidity window mechanisms (i.e. mechanisms whereby, before the end of the life of the ELTIF, full or partial matching of subscription and redemption orders will be possible) will be introduced.
- It will be no longer required to provide the regulator of the ELTIF an itemised schedule for the orderly disposal of assets, unless that schedule is expressly required by the regulator. The ELTIF will only have to inform its regulator about the orderly disposal of the assets at the latest one year before the date of the end of the life of the ELTIF.
