The European Long-term Investment Fund (Eltif) is a new type of regulated fund to facilitate retail and institutional investment in projects that require long-term capital, such as infrastructure, real estate, transport and energy. The intention is to create a single market in the EU for long-term investment funds, in order to help facilitate the financing of the real economy.
Eltifs will be of interest to fund managers of alternative asset classes who want to access the retail market on a cross-border basis. On the investor side, we expect Eltifs to appeal mostly to the affluent retail market and – as a ‘branded’ product with the hallmarks of investor protection – to local government pension schemes. Also, potentially to the EU insurance sector, given that Eltifs and infrastructure benefit from more favourable regulatory capital treatment under Solvency II. Although Eltifs could be used by fund managers targeting professional investors only, the more prescriptive investment restrictions of Eltifs (outlined below) may mean that managers decide to stick with traditional investment vehicles when targeting such investors.
An Eltifs can take any legal form, although it has to be a closed-ended EU alternative investment fund managed by an EU alternative investment fund manager under the Alternative Investment Fund Managers Directive. To appeal to the retail market, redemption can be offered at the manager’s discretion, from five years into the life of an Eltif or halfway through its life (whichever is earlier). However, we would expect that liquidity will most likely be delivered by the secondary market, including the trading of interests in listed Eltifs.
At least 70% of an Eltif’s capital must be invested in ‘eligible assets’, which include debt and equity investment in, and loans to, most unlisted and small listed companies. Fund investments can only be in other Eltifs, European Venture Capital Funds and European Social Entrepreneurship Funds, and up to a maximum of 20% of an Eltif’s capital. For real assets to qualify, they must be more than €10 million in portfolio value and of economic and social benefit; and for commercial real estate and housing, contribute to sustainable and inclusive growth in Europe (therefore no speculative development). Diversification requirements apply.
Leverage limits are low (broadly, an Eltif’s borrowing cannot represent more than 30% of its capital). Eltifs can only use derivatives for hedging purposes, cannot have exposure to commodities, and are subject to restrictions on securities lending.
MARKETING TO RETAIL INVESTORS
Managers have additional obligations when marketing an Eltif to retail investors (who, if they have less than €500,000 to invest, are subject to a €10,000 minimum investment and a 10% cap on their Eltifs investments). These include producing a key information document, as well as a prospectus; carrying out an assessment on the ‘suitability’ of the Eltif; having a bank depositary; and providing local facilities agents in each member state where they intend to market.
The Eltif could be a welcome addition to the menu of investment vehicles available to both managers and investors. However, despite being available since December 9, 2015, to date none have been launched. No doubt this is in part due to some technical uncertainties, including the pending finalisation of Regulatory Technical Standards, tax treatment and the need for further guidance. There was, however, a pause before the retail funds industry embraced Ucits: the same may prove to be the case for Eltifs, once the outstanding issues referred to above have been clarified. fe
Louisa Cobbe is senior associate, investment management and Chris Ormond is knowledge development laywer, investment management, Berwin Leighton Paisner
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