Negotiations have concluded between the European Council and the European Parliament on changes to the European Long Term Investment Fund (ELTIF). The agreed reforms are likely to improve the functioning of the ELTIF, making it a more attractive vehicle to managers and investors that wish to benefit from the EU’s passport for a retail alternative fund.
The headline parts of the agreement are as follows.
- More flexible investment rules. The changes include a removal of the threshold for real asset investments, such as infrastructure, and an increased market capitalisation threshold for small and medium-sized enterprise investments. These reforms broaden the scope of the ELTIF’s holdings, potentially resulting in a greater diversity of investments.
- Increased diversification limits. The ELTIF must hold a minimum of 55% of its portfolio in ELTIF-eligible assets, permitting a greater number of liquid holdings than the current 70% minimum threshold. Individual investments will also be capped at 20% of the total portfolio. While Net Asset Value will be used to calculate leverage limits, regulators will need to determine a different method for the purposes of calculating diversification.
- More latitude to create fund-of-funds and master-feeder structures. Full fund-of-fund structures will be permitted (i.e. investments in funds that are not ELTIFs or UCITS is allowed up to 100% of the fund’s value). The limit for investment in individual funds will be capped at 10%. The new rules will require the master fund in a master-feeder structure to be an ELTIF and only permitted to invest in EU AIFs.
- A clear division between ELTIFs marketed to retail and solely to professional investors. The different regimes permit professional-only funds to undertake greater amounts of cash borrowing, while there is a stronger emphasis on investor protection requirements for ELTIFs marketed to retail investors.
- Partially open-ended ELTIFs will be permitted. Redemptions will be allowed before the end of a fund’s life cycle, subject to liquidity management requirements that will be discussed further in the technical "mop up" negotiations on the text.
While our sense is that professional-only ELTIFs are unlikely to have great appeal, given the availability of alternative investment options already available to professional investors, the increased ability for the ELTIF to invest in a variety of assets and to fit within broader fund structures is a positive step.
Certain proposed elements have been cast aside. For instance, the potentially administratively challenging suggestion of a secondary market liquidity matching mechanism has gone, along with (for now at least) the creation of an optional "green ELTIF" in favour of clarifying that ELTIFs must comply with existing EU ESG regulations such as the Sustainable Finance Disclosure Regulation.
There are outstanding issues to be resolved. Not least the details of a grandfathering mechanism for legacy ELTIFs to ensure that they remain compliant. Discussions will also address how managers can comply with the new regime earlier than the implementation date if they choose to do so. The ESAs will have nine months to develop Regulatory Technical Standards, comprising detailed rules in certain areas of the legislation.
Implementation could be 24 months after the legislation enters into force, meaning the new rules could take effect at the turn of 2025.