Jeremy Albrecht, Managing Director, Head of Continental Europe, UK and Ireland, Client Coverage at RBC Investor & Treasury Services: The European Long-Term Investment Fund (ELTIF) is perhaps the most well-known of the illiquid investment products currently being sold to retail investors. However, ELTIFs have not enjoyed much capital-raising success. According to EU data, only 67 ELTIFs have been authorized over the last seven years across four member states, accumulating just €2.4 billion in assets.¹ Despite this weak start, there is reason to be optimistic about ELTIFs’ long-term prospects.
The ELTIF regulations are currently under review by the EU as part of the Capital Markets Union (CMU), and we expect a number of positive changes to be implemented. It is likely that many of the restrictions which have impeded ELTIFs will be removed, based on the draft proposals we’ve seen.

The draft amendments indicate that ELTIFs will no longer need to invest in purely European projects, giving managers more flexibility.² The proposals will also eliminate some of the barriers, which have precluded retail investors from buying into ELTIFs. For example, the proposals scrap the €10,000 minimum investment threshold—together with the 10% aggregate threshold for retail investors whose portfolios are below €500,000.³

Michael Humphreys, Director, IQ EQ Fund Management (Ireland) Limited: The European Long Term Investment Fund (ELTIF) is unusual in having a European “passport” to allow marketing across the European Economic Area (EEA) to both professional as well as retail investors. Despite this attractive feature, relatively few ELTIFs have been established since the regime was introduced in 2015. Interest in ELTIFs is likely to increase however, due to a proposed revision to the ELTIF Regulations which has been agreed at European level and which is expected to apply later this year.

The revised regulations incorporate numerous changes which address some of the limitations of the current ELTIF regime. While the ELTIF will remain in principle a fixed-life closed-ended alternative investment fund (AIF), the revisions allow some flexibility for redemptions and capital repayments during the life of the AIF and also for a transfer market to allow the interests of exiting and incoming investors to be matched by the fund.

The categories of qualifying assets in which an ELTIF may invest has been broadened and the percentage of assets that must so qualify has been reduced to 55%. It will be possible to use ELTIFs for fund-of-fund strategies where the underlying funds are generally invested in suitable long-term investments. It should also be possible to use ELTIFs for hybrid funds with a combination of both illiquid long-term investments as well as more liquid investments including investments in UCITS funds.
The minimum real asset purchase price has been reduced and the exposure cap to individual real assets has been increased which together should make portfolio composition easier for funds investing directly in real assets. For small and medium-sized enterprise (SME) focussed funds, the market cap threshold for investment in listed shares has been increased from €500m to €1.5bn which should significantly widen the universe of investable companies. In addition, investments (including SME and direct asset investments) will no longer need to have a European focus and can be global.

On the distribution side the requirement to advise investors has been removed, the suitability requirement has been aligned with Markets in Financial Instruments Directive (MiFID) requirements, and there are reduced requirements for ELTIFs marketed solely to professional investors. Additionally, the minimum €10,000 investment amount and 10% cap of portfolio exposure to ELTIFs for investors with financial portfolios of less than €500,000 has been removed. In the case of ELTIFs managed on a cross-border basis, the revised regulation also removes any requirement of the Alternative Investment Fund Manager (AIFM) to obtain approval from the regulatory authority of the jurisdiction of the ELTIF.

While the changes to the regulation are welcome, there have been some criticisms that the changes may not have gone far enough. Examples of areas in which this may be the case include the continued inability to set up a fully open ended ELTIF, an evergreen ELTIF, or a feeder ELTIF (except one feeding into another ELTIF). Overall, however, the changes appear to address many of the key limitations of the current ELTIF regime. While it remains to be seen to what extent ELTIFs become a more mainstream vehicle of choice for investment managers of alternative strategies who have ambitions to distribute to retail investors, there are good reasons to expect renewed interest among asset managers to assess the ELTIF structure as a vehicle for their upcoming fund launches.