ELTIF: second time’s the charm
The European Commission’s reform of the European Long-Term Investment Fund (ELTIF) framework opens the door for master feeder and fund-of-funds structures, which might allow smaller and mid-cap GPs to access retail investors without the need for a dedicated operational setup.
The original text, which came to market in 2015, allowed for an ELTIF to invest only 20% of its assets in other funds. Under the revised legislation, master feeder structures are possible in instances where both funds are ELTIFs. Additionally, ELTIFs can invest in EU AIFs administered by EU managers, which opens the door for fund-of-funds structures. In turn, this could enable smaller and mid-cap firms that lack the operational capabilities to set up their own, retail investor-focused ELTIF, to participate in the market.
“Some GPs’ operations will be under considerable strain with onboarding the sheer amount of individual retail investors,” says Goji’s CEO, David Genn. “The possibility of a fund-of-funds facilitates involvement, particularly for smaller and mid-cap firms that would otherwise struggle with the operational aspect of retail investing.”
Marc Meyers, managing partner and partner, investment management at Loyens and Loeff Luxembourg, adds: “The additional flexibility in terms of redemptions, as well as the possibility for managers to offer investors the possibility to engage in secondary trading of their interests in which the manager helps with matching transfer requests, will further contribute to the launch of more (semi-)open-ended retail ELTIFs.”
However, it is not that simple, as a dedicated retail offering comes with its own regulations. “Launching a dedicated retail offering via the ELTIF will expose managers to some legislative requirements they have not encountered before,” explains Sebastiaan Hooghiemstra, senior associate investment management at Loyens and Loeff Luxembourg. “Additional, specific regulations apply to managers marketing to retail investors, alongside requirements for onboarding and distribution.”
Retail investment is not the ELTIF’s sole intended use, however. “While predominantly aimed towards retail investors, the structure now holds a relaxation of certain rules for ELTIFs that are solely marketed to professional investors,” clarifies Hooghiemstra.
If a fund is marketed exclusively to professional investors, previous roadblocks such as requirements around portfolio composition, diversification and concentration will not apply. Additionally, the leverage limitation, originally set at 30% of a fund’s capital, has been raised to 100% if a fund is marketed exclusively towards professional investors.
Finally, the reforms allow for co-investment as the requirement for majority investments has been removed, so long as any conflicts of interest are identified and appropriately managed.
What else is new?
Definitions of eligible assets are now aligned with the MiFID framework, clarifying the scope and establishing direct ownership of assets. Previously, it was unclear which assets would qualify as eligible and ownership was only possible indirectly.
Additionally, the reforms have abolished several previous investment thresholds, including:
- The minimum investment value requirement of €10m has been removed
- Market caps for small and mid-cap investments have been enlarged from €500m to €1.5bn, increasing the pool of potential investment targets
- The outright prohibition of investing in financial undertakings such as credit institutions or fintech companies has been removed
- The required percentage of capital that needs to be allocated to eligible assets has been lowered from 70% to 55%.
Industry organisations and service providers welcome the European Commission’s reforms.
“With the revised ELTIF regime, the European Commission effectively resolved real concerns about the deployability of the ELTIF vehicle, removing roadblocks while not compromising on investors’ safety,” says Elona Morina, regulatory policy adviser at the European Fund and Asset Management Association.
“ELTIF 2.0 has broadened investment horizons,” adds Meyers. “With a simplified real asset definition, new categories of eligible assets, a lowering of the eligible asset investment threshold, as well as more flexible diversification limits, the ELTIF will undoubtedly be attracting significantly higher interest from managers and investors alike.”
The reforms aim to increase the ELTIF’s flexibility by addressing the pain points that the European Commission initially identified. Removal of barriers such as the minimum requirements around investments from individual investors and the prohibition of investing in financial undertakings, as well as redefining thresholds such as market caps on targeted assets and capital allocations, should increase the appeal of the structure.
While it comes with added benefits if marketed solely toward professional investors, particularly for small and mid-cap GPs, the added possibility of a master feeder or fund-of-funds structure, at least on paper, facilitates access to the retail investor market base, which would be otherwise blocked by operational limitations.