“The Council adopted on 20 April 2015 a regulation aimed at increasing the pool of capital available for long-term investment in the EU economy by creating a new form of fund vehicle.
European long-term investment funds (ELTIFs), by virtue of the asset classes that they will be allowed to invest in, are expected to provide investors with long-term, stable returns.”
In order to understand the motivation behind European lawmakers’ will to create this new type of investment vehicle, one must begin with the following figure:
1’500 to 2’000 billion EUR will be needed to finance infrastructure project needs alone in Europe within the next 5 years, European officials estimate.
Thus, ELTIF’s have been created in order to meet that demand, and in so doing, increasing the amount of non-bank finance.
Who will be potential investors in an ELTIF?
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Pension funds
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Municipalities
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Insurance companies
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Retail investors
As indicated in their name, ELTIF’s are long-term investment funds. This means the assets allocated to the fund are committed for long periods of time. Redemption requirements are considerably stricter than those of UCITS, which means that retail investors must be clearly informed about these redemption restrictions, and are strongly advised not to invest all their savings in this type of fund. ELTIF’s offer a potential “illiquidity premium” which will serve as compensation for their patience.
Nevertheless, the European Union envisages that a secondary market will emerge, giving investors the chance to sell units or shares.
What can ELTIFS invest in?
One of the principle rules set out by the EU regulation, will be the 70% rule: an ELTIF must invest at least 70% of the funds’ assets in unlisted companies needing long-term capital (e.g. infrastructure projects such as transportation and renewable energies). ELTIFS can also invest in certain listed small and medium-term companies, real assets, and European venture capital Funds.
ELTIFs will only focus on alternative investments that fall within a defined category of long-term asset classes whose successful development requires a long-term commitment from investors.
This will include:
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Non-listed undertakings that issue equity;
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Debt instruments for which there is no readily identifiable buyer;
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Real assets that require significant up-front capital expenditure;
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SMEs admitted to trading on a regulated market or on a multilateral trading facility
What exactly is “long-term”?
ELTIFS will have up to 5 years to invest at least 70% of its assets.
Why only 70%?
The remaining 30% can be invested in UCITS-eligible assets. This 30% buffer allows for an initial amount of liquidity, as early redemption can be made possible for certain investors.
How is an ELTIF managed?
ELTIF’s must be AIFMD compliant. This not only means that the manager must be authorized, but also means the obligation for a depositary. The money in an ELTIF will in principle be committed to the fund for the duration of the fund. ELTIF managers must be European and must be domiciled in the European Union.
How does this new type of fund change the European fund landscape?
When one thinks of European retail funds, one thinks first and foremost of the UCITS, which is the obvious comparable. So what are the differences between these two funds?
The main differences between these two funds lie in the liquidity obligations and investment policies. When invested in a UCITS, an investor must be able to exit every two weeks, and the investment policy requires managers to invest in transferable securities, allowing fortnightly redemption. This requires frequent net asset value calculations and important liquidity.
As aforementioned, assets invested in the ELTIF will be committed for the duration of the fund (minimum 5 years).
In line with the desired object of the ELTIF – to serve the purpose of contributing to smart, sustainable and inclusive growth – this new fund will make available illiquid assets from new types of investors, precisely retail investors (as opposed to the usual institutional investors).
This new fund can be considered a safer choice than alternative investment funds (AIF’s), while allowing more diverse investment strategies.
Why invest in an ELTIF?
This efficient new fund presents several advantages:
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Safer choice than alternative investment funds (AIF’s)
Legal framework on investment policies set out in the European regulation, safeguarding investor protection. Key investor document (KID) must be published.
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Open to retail investors (minimum investment of EUR 10’000)
Unlike Alternative Investment Funds, which are reserved for institutional and well-informed investors who must invest a minimum of 125,000 EUR, ELTIF’s require a minimum investment of 10’000
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Allows more diverse investment strategies than UCITS
UCITS are subject to a restrictive investment policy, under which the management can only invest in transferable securities. Eligible investment assets for ELTIFs are generally illiquid, require commitments for a certain period of time, and have an economic profile of a long-term nature. Eligible investment assets are non-transferable securities and therefore do not have access to the liquidity of secondary markets. ELTIFS can invest in listed SME’s (small to medium-sized enterprises).
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ELTIF’s allowed to borrow up to 30% of the fund’s capital value, allowing additional returns to investors
Allowing ELTIF managers to borrow a reasonable sum may allow for more liquidity and better returns. In order to eliminate the risk of currency mismatches, the ELTIF should borrow only in the currency in which the manager of the ELTIF expects to acquire the asset.
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Possibility for units or shares to be sold on the secondary market
The rules or instruments of incorporation of an ELTIF should not prevent units or shares of the ELTIF being admitted to trading on a regulated market or on a multilateral trading facility, nor should they prevent investors from freely transferring their units or shares to third parties who wish to purchase those units or shares
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Possibility for “illiquidity premiums” (investor incentives to commit for a longer period of time
In its factsheet published on 13 February 2015, the European Commission has opened the possibility to such premiums, rewarding (and incentivizing) investors for their patience.
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ELTIF’s will potentially be investing in equity stakes and providing loans to unlisted companies for which it is more difficult to obtain funding.
Investing in an ELTIF, which has bought equity stakes can prove to be very lucrative.