Efforts to rescue the stricken European Long Term Investment Fund (ELTIF) are underway, dubbed ‘ELTIF 2.0’ as EU regulators update the rules to make the product more appealing to retail and institutional investors.
Richard van’t Hof, Managing Director – JTC Luxembourg, explores what the rule changes mean, and whether they will be enough to convince previously sceptical investors to park money in ELTIFs.
A fund wrapper that failed to capture the public’s imagination
Unveiled eight years ago, the first version of the ELTIF was designed to allow retail investors to gain exposure to long-term or illiquid assets, including infrastructure, real estate, unlisted companies, or green projects in the European Union (EU).
Although a good idea in principle, ELTIFs did not take off, as the structure was viewed by investors as being excessively complex and inefficient. As a result, just 89 ELTIFs were ever launched, which between them managed only €10 billion in assets.
Amendments to the ELTIF provisions – otherwise known as ELTIF 2.0 – were introduced in April 2023 and will come into effect on January 10, 2024.
So, what does ELTIF 2.0 mean for the industry?
Getting to the bottom of ELTIF 2.0
ELTIF 2.0 makes a number of improvements to the existing regulatory regime, benefiting both managers and investors.
Firstly, the rules around asset eligibility have been loosened.
Highlights here include a simplified definition of what qualifies as a real asset; eased restrictions on investing into non-EU assets; improved structuring options for indirect investments, master feeder structures and fund of fund strategies and fewer constraints around borrowing (albeit only for funds being sold to professional investors).
The ELTIF portfolio composition and diversification rules have been tweaked for the better. For example, the rules reduce the minimum capital threshold for which ELTIFs must invest into eligible assets from 70% to 55%. This has obvious liquidity advantages.
Furthermore, the ceiling for investments into single real assets; instruments issued by a single qualified portfolio undertaking; simple, transparent, standardised (STS) securitisations; and units/shares of any single ELTIF/European Venture Capital Fund (EuVECA)/ European Social Entrepreneurship Fund (EuSEF)/UCITS/EU alternative investment fund (AIF), have been increased from 10% to 20%.
ELTIF 2.0 also provides investors with redemption rights during the fund’s lifecycle under a specific set of circumstances, although the precise terms and conditions have yet to be made public by the European Securities and Markets Authority (ESMA).
And finally, the latest ELTIF amendments are expected to have a positive impact on distribution.
This is because ELTIF 2.0 removes the €10,000 initial minimum entry ticket requirement, and the investment cap of 10% for retail investors whose portfolios do not exceed €500.000.
Will it work?
Notwithstanding the final outcome of the ESMA consultation, JTC Group is working on a number of projects with clients who are exploring the merits of whether to leverage ELTIF 2.0.
Based on our conversations with clients, many are supportive of the ELTIF 2.0’s revisions, as they believe it will stimulate investment into illiquid assets and make distribution to retail allocators that bit easier.
This also comes as more retail clients – hungry for returns and risk diversification – are now investing into private markets, an asset class that was historically only accessible by large institutions. According to reports, individual investors hold 50% of the estimated $275 trillion to $290 trillion in global assets yet account for just 16% of the assets managed by alternative investment funds.[1]
As a result, we anticipate there will be significant interest in the revamped ELTIF wrapper, and this could translate into substantial inflows.
Ensuring the success of ELTIF 2.0
While EU regulators have made ELTIFs more enticing, asset managers need to ensure they select the right sort of service provider and jurisdiction when launching these products.
Boasting excellent regulations that support investor protection and encourage product innovation, Luxembourg – Europe’s premier investment fund centre and the second largest investment fund centre in the world – is well placed to accommodate the ELTIF 2.0.
In fact, its position at the heart of Europe in terms of geography and financial services, with a multilingual, highly skilled and experienced workforce, has already proven to be a leader on ELTIFs in their original form.
Of the ELTIFs already in existence, Luxembourg has positioned itself as the leading jurisdiction in terms of assets under management (AUM) as well as number of funds, with 60% of launched ELTIFs[2].
JTC Group in Luxembourg) offers a number of extensive services to ELTIFs, including fund administration, accounting and reporting, domiciliation, directorship & management, regulatory and investor reporting, and transfer and investor services.
At JTC, we are prepared for the changes, as we operate a variety of best – in –class systems to deliver and maintain an impeccable standard of administration while also using technology to innovate in both service delivery and efficiency.
The EU is confident that the new ELTIF 2.0 can not only save a sinking ship, but relaunch it to a wider world and capture the imagination of the public. Hopefully this rising tide with raise all European funds with it.
This article originally appeared in the October edition of Real Deals magazine. You can read the full publication online here.
How can JTC help?
JTC’s Luxembourg office opened in 2009 and acts as our European centre for funds and corporate service, providing fund administration, corporate and real estate services for clients right across the continent.
Find out more by contacting Richard directly or via our dedicated Luxembourg page here.
[1] Investment Week – May 18, 2023 – Retailisation of private markets: Unlocking the discretionary space will be a game changer
