Established in 2015, the European Long-Term Investment Fund (ELTIF) was created to provide investors with an opportunity to invest in long-term projects that support growth and job creation.
However, despite its upsides, the uptake of ELTIF has been slow. According to Zeidler, this due to several regulatory and operational challenges.
To deal with this, the EU created ELTIF 2.0. This amended regulation aims to be a new and improved version of this fund type that aims to address these issues and unlock the full potential of long-term investments.
ELTIF 2.0 was entered into force on April 9th, 2023, and the amendments to the ELTIF Regulation will apply from January 10th, 2024.
Zeidler remarked, “ELTIF 2.0 addresses several supply and demand constraints and clarifies the scope of eligible assets and investments, portfolio composition and diversification requirements, cash borrowing and lending conditions and other fund rules, including sustainability considerations.
“The changes create improvements aimed at increasing investor protection and facilitating the creation of a more diversified and transparent market. The main aim of ELTIF 2.0 is to increase participation by retail investors, for example through private equity, which is traditionally the sphere of wealthy investors and institutions.”
ELTIFs invest on a long-term basis in infrastructure projects, real estate and SMEs, among others. The aim of the ELTIF regulation was to support the development of ELTIFs as an alternative long-term investment vehicle for institutional and retail investors and to encourage long-term investments towards European long-term investments in the EU’s ‘real economy’.
Despite the aims to promote European long-term investments, since the introduction of the ELTIF Regulation in 2015, only a relatively small number of ELTIFs have been authorised.
What are some of the key changes of the regulation? According to Zeidler, these are increased investor protection, simplification of the suitability test required for ELTIF managers, ease of requirements for marketing to retail investors, the encouragement for long-term investments, ELTIF manager authorisation, enhanced market liquidity and redemption rights and amendments to eligible assets and portfolio diversification.
ELTIF 2.0 permits fund of fund strategies and removes the 20% investment limit. It also expands the scope of eligible collective investment undertakings to include ELTIFs, EuVECAs and EuSEFs and UCITS and EU AIFs managed by EU AIFMs (with setting a concentration of limits of no more than 30% of the units or shares of a single ELTIF, EuVECA, EuSEF, UCITS or EU AIF) as eligible investments.
The investment rules are further amended with regard to master-feeder ELTIFs structures by permitting that one ELTIF may invests at least 85% of its assets into another ELTIF.
Zeidler said, “ELTIF 2.0 distinguishes between ELTIFs marketing to professional investors and ELTIFs marketing to retail investors. It is noteworthy that ELTIFs marketing solely to professional investors will be able to take advantage of the revised leverage limit, increased from 30% to 100% of such ELTIF’s net asset value.
“In addition, ELTIF 2.0 increases borrowing limits (exceeding short-term borrowing) from 30% to 50% of the net asset value of the ELTIF, when marketing to retail investors, and 100% of the net asset value of the ELTIF, if marketing only to professional investors.”
Existing ELTIFs or those established between 9 April 2023 and 10 January 2024 can choose to opt-in to ELTIF 2.0, subject to notification of the competent authority of the ELTIF, such as the CSSF in Luxembourg or the CBI in Ireland.
This, Zeidler claims, creates an opportunity for structures that do not yet exist or are not yet authorized as ELTIFs prior to 10 January 2024 to take advantage of the ELTIF 2.0 regime from their establishment/authorisation date, subject to the non-objection of the relevant regulatory authority.
ELTIFs authorized under the original regulation before 10 January 2024 are deemed to comply with ELTIF 2.0 until 11 January 2029. After this date, they will need to comply with ELTIF 2.0. However, if such ELTIFs do not raise additional capital on or after 10 January 2024, they will be deemed to comply with ELTIF 2.0 even after 11 January 2029.
Zeidler concluded, “ELTIF 2.0 represents a significant step forward in the development of a robust and efficient long-term investment market in the European Union. By introducing greater investor protection, a more diversified investment market, enhanced market liquidity, and longer investment periods, ELTIF 2.0 aims to unlock the potential of long-term investments and support economic growth. Investors and fund managers should note these developments and consider the opportunities presented by the new ELTIF framework.”
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