Georg Lasch, head of offshore sales at BNP Paribas Securities Services in Luxembourg, sets out how European Long Term Investment Funds (ELTIFs) offer investors the chance to make returns while investing in socially useful projects.
European Long Term Investment Funds (ELTIFs) are attracting interest from investors and fund providers alike, as their numerous benefits, including promoting positive social effects, become apparent.
ELTIFs use private capital and are closed-end structures. The idea is to invest in unlisted small and medium enterprises, social infrastructure projects, real estate assets with an economic or social benefit amongst other eligible investments. It aims to provide investors with long-term stable returns and to help stimulate employment and economic growth in the EU by increasing investment in, for example, infrastructure projects. The European Commission has said ELTIFs could play an important role in the post Covid-19 recovery.
Investors in an ELTIF are not able to redeem their units or shares before the end of the life of the fund. However, they can freely transfer their units or shares to third parties other than the manager of the ELTIF, and may be able to obtain a compensating “illiquidity” premium.
As the Association of the Luxembourg Funds Industry (ALFI) puts it, ELTIFs are Alternative Investment Funds (AIFs) that allow investors “to put money into companies and projects that need long-term capital”.
Luxembourg, the second-biggest fund centre in the world after the US, is the natural choice for ELTIFs. Total assets under management in Luxembourg-domiciled investment funds recently reached the €5 trillion mark.
At BNP Paribas Securities Services, we are seeing first-hand the soaring interest in ELTIFs. Our longstanding experience in Luxembourg also makes us uniquely positioned to help the growing number of asset managers setting up these vehicles.
In this light, BNP Paribas Securities Services proudly onboarded in May 2021 the first two closed-ended ELTIFs launched by Azimut Investments. The Umbrella Fund, incorporated in Luxembourg, sets out diversified targets for each sub-fund that will play a key sustainable and local role through investments in the real economy, with a special focus in Italy. This-long term partnership will allow BNP Paribas Securities Services to accompany Azimut in setting up each ELTIF sub-fund, and support its investments in innovative areas including digital and crowdfunding platforms.
The investment backdrop is also helpful for ELTIFs. As KPMG stated in a recent note on the vehicle,1 consumers are sitting on record levels of cash, which “could materialise in long-term investments in the event that investors look for opportunities to diversify their portfolios”.
KPMG adds: “Such investments offer attractive returns as well as low correlation with traditional investments, all while taking advantage of historically low bank rates. And this is where ELTIF comes into its own, as it contains the necessary rules (albeit sometimes restrictive) to protect retail investors.”
ESG & ELTIF
Environmental, social and governance (ESG) factors are major themes for European investors. Some sponsors are launching ELTIFs with ESG as a key component. In October, Commerz Real described its new product, Klimavest, as the first impact fund for private investors that focused on real assets such as property and infrastructure. Over the course of its fund term of at least 50 years, it intends to grow a portfolio of renewable energy generation investments, sustainable infrastructure, mobility assets, and forestry with a value of at least €25 billion. Of this, roughly €10 billion is equity capital. Commerz Real says Klimavest buys assets that make a tangible and demonstrable contribution to a reduction in carbon dioxide emissions.
Slow burner
It is worth noting that ELTIFs have not had a smooth journey since they first launched in 2015.
Some investors found the instrument too complex and pointed to a lack of tax incentives. Retail investors, especially, had failed to express much interest. Inevitably, the majority of investment will come from institutions, family offices, and high-net-worth individuals.
However, retail could be an important channel if the product is right. Last year, the European Commission launched a consultation exercise to see what would make ELTIFs more attractive to asset managers and investors.
It is significant that, even in the last year, and prior to the results of the consultation, the number of new ELTIFs launched in the space of less than a year is more than in the previous three.
ELTIFs are attracting interest in certain geographies, notably Italy and Spain. In Italy, tax incentives are helping to boost the attraction for retail investors. BNP Paribas Securities Services has a strong presence in Italy – we are the biggest non-domestic provider there, as we are in Spain. We have a strong client base in both markets, and we are a significant promoter for some funds.
Growing the ELTIF market
The European Securities and Markets Authority (ESMA), among others, has made several suggestions about what would make ELTIFs work better. In a letter to Mairead McGuinness, Commissioner for Financial Services at the European Commission, ESMA set out areas where it feels improvements could be made to ELTIFs.
These include amendments to rules around eligible assets and investments, the authorisation process, portfolio composition and diversification, redemptions, disposal of assets, prospectus and cost disclosure, specific requirements concerning retail investors, and other residual areas. ELTIFs could be allowed take the form of open-end structures, alongside the current closed-end structure.
It is still not clear what amendments will be made as a result of the consultation. Whatever the outcome, however, asset managers will need specialised services and dedicated expertise to help them navigate the ELTIF landscape.
Like most other alternative products, ELTIFs must be managed by an authorised Alternative Investment Fund Manager (AIFM), which benefits from a passport enabling it to offer its management services and market its AIFs (including its ELTIFs) throughout the EU.
BNP Paribas Securities Services is an obvious choice for AIFMs’ needs. We have been in Luxembourg as a provider since 2001, and as a bank for 100 years, currently servicing almost 50% of all Luxembourg ELTIFs.
About BNP Paribas Securities Services Luxembourg
We are the biggest banking institution, the largest depositary for alternative funds, and the third-biggest fund administrator in Luxembourg. We have 1,050 staff based in the Grand Duchy and a wealth of experience in private capital. We offer the full range of services, including depositary, custody, fund accounting and transfer agency.2
For any requirements in Luxembourg relating to ELTIFs or our wider range of services, contact us through https://securities.cib.bnpparibas/contact-us/write-to-us
2 – https://www.bnpparibas.lu/en/businesses/corporate-institutional-clients/securities-services
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