ESMA offers its view on ELTIF reform

ESMA has sent a letter to the European Commission (EC) detailing its views on the European Long Term Investment Funds (ELTIFs) review and highlighting potential areas for reform.

ESMA states that the ELTIF has the potential to support economic recovery from Covid-19. However, as has been noted by many industry commentators, to date, take-up for ELTIF products has been very limited. Total assets under management in ELTIFs across Europe amounts to €1.5bn, compared with €6.7tn total AuM in all alternative investment funds. Feedback to ESMA from national regulators suggests that the framework needs to be improved to be effective.

The letter proposes the following changes to the ELTIF regime:

• broadening the scope of eligible assets, including permitting investment in funds other than ELTIFs, EuVECAs and EuSEFs and doubling the market capitalisation threshold for investee companies from €500m to €1bn;
• removing the "double authorisation" requirement for national regulators to approve both the EU AIFM that intends to manage the ELTIF and the ELTIF itself;
• amending the conflict of interest rules to ensure that AIFMs managing ELTIFs and other funds can co-invest so long as any conflicts are identified and appropriately managed (rather than the current provision that appears to ban co-investment);
• removing the obligation on AIFMs to disclose to competent authorities the schedule by which an ELTIF’s assets would be disposed so that investors can redeem their shares at the end of the life of the fund, unless the competent authority requests the disclosure;
• potentially permitting listed ELTIFs and "evergreen" ELTIFs with an indefinite duration;
• reconciling the costs disclosure requirements in the ELTIF Regulation and the PRIIPs Regulation, which is relevant when an ELTIF is marketed to retail investors;
• removing the requirement for local facilities agents and moving to direct interaction between investors and fund managers, in common with other European fund rules; and
• encouraging tax incentives for the ELTIF at the national level, which could address the tax neutrality of the fund.

ESMA’s proposals, if implemented, would be a positive development for the ELTIF.

Macfarlanes has contributed to AIMA/ACC’s and Invest Europe’s responses to the consultation for ELTIF reform. While ESMA’s recommendations are largely aligned with these and other industry participants’ views, there are some important differences in emphasis and views.

ESMA emphasises the different requirements of professional and retail investors in ELTIFs. Specifically, ESMA calls for greater flexibility in portfolio composition and borrowing limits for professional investors, and greater levels of protection for retail investors in respect of liquidity management and the fund’s maturity.

Furthermore, while ESMA’s recommendation to permit ELTIFs to invest in funds other than ELTIFs, EuSEFs and EuVECAs would be an improvement, industry commentators have suggested that the regime should go further, proposing that ELTIFs should be permitted to invest in fund-of-fund structures, lifting the 20% limit on exposures to other funds. It has been argued that this would allow better diversification, making ELTIFs more appealing to investors.

The EC will consider the feedback that it has received in response to the consultation. It is expected to publish a draft legislative proposal in the latter half of 2021.