ELTIFs across the EU - now and future developments

The ELTIF review and the position of ELTIFs across the EU

This note is in two parts:

In the first, we examine the review of the European Union’s (EU) European Long-term Investment Fund Regulation (the Regulation) – its timing and which aspects are under consideration by the Commission in order to improve the regulatory framework.

In the second part, we look at the situation in six key Member States – France, Germany, Ireland, Italy, Luxembourg and the Netherlands – to consider, for each:

• what the take up of ELTIFs has been, and why it has been less than anticipated;
• what alternatives to the ELTIF are available; and
• what market developments we envisage in the area of longer-term investment (especially in respect of retail investors).

The table of responses can be found here.

Background

The challenge of opening up - ‘democratising’ - investment opportunities in private and less liquid asset classes is not new.

However, at a time when governments need new sources of investment capital to fund the projects and infrastructure crucial for a post-COVID economic recovery, the impetus to find a workable solution which can open up significant sources of investment capital is far greater now than before the pandemic.

Democratisation of investment is also the subject of much work in the UK and, as a result, it can be seen as a developing area of post-Brexit divergence. On 27 September 2021, for example, the UK’s Productive Finance Working Group published a significant report, “A Roadmap for Increasing Productive Finance Investment” (the Report), which sets out practical solutions to the barriers investing in longer term and less liquid assets, especially in the context of Defined Contribution (DC) pension schemes. See our summary of the report here.

A key comparative reference point for what is happening in the UK is the EU’s European Long-term Investment Fund (ELTIF) – a vehicle which failed to achieve the impact that had been anticipated and which is currently under review by the European Commission (the Commission). Take up of the ELTIF has differed significantly across EU27 Member States, some of which are also launching their own initiatives to encourage new investment in crucial areas of their economies.

The ELTIF Regulation

It is nearly six years since the ELTIF Regulation came into force.

The Regulation created the ELTIF, a new vehicle intended to offer investors with long-term, stable returns and help stimulate employment and economic growth in the EU by increasing investment in, for example, infrastructure projects.

ELTIFs must be managed by an authorised EU AIFM but, so long as they follow a notification procedure under the AIFMD, they can be marketed to retail as well as to professional investors across the EU.

To ensure adequate investor protection was provided, the asset classes in which an ELTIF could invest are restricted and the manager must comply with fairly extensive disclosure obligations.

A summary of the main provisions of the Regulation can be found here.

However, despite the good intentions, the ELTIF has not been the success that had been hoped. Since its inception in December 2015, only 51 have been registered with ESMA and these are concentrated in only four Member States - Spain, France, Italy and Luxembourg. Of the 51 registered ELTIFs, only 26 are marketed in a different Member State from the one in which they are registered – and nine have not yet been marketed at all.

The review of the ELTIF Regulation

Why is there a review? What does it cover?

As usual with EU legislation, the Regulation contains a review clause, which mandates the Commission to report to the European Parliament and Council, with a particular focus on:

• the impact of the Regulation’s provisions on the redemption policy and the life span of the ELTIF;
• how the minimum threshold of 70% of eligible investment assets laid down in Article 13(1) of the Regulation impacts on asset diversification by an ELTIF;
• the extent to which ELTIFs are marketed in the EU, including whether sub-threshold AIFMs (as defined in Article 3(2) of AIFMD) might have an interest in marketing ELTIFs;
• whether (and if so, how) the list of assets and investments in which an ELTIF can invest should be updated; and
• whether changes are needed to the current rules on diversification, portfolio composition and cash borrowing limits.

What's happening?

The Commission’s report was meant to have been submitted by June 2019, but this deadline has slipped.

Work has, though, been going on behind the scenes:

• in June 2020, the Final Report of the Commission’s High-Level Forum on the Capital Markets Union recommended targeted amendments and/or new provisions should be made to the ELTIF regulatory framework, such as reducing barriers to investments and broadening the scope of eligible assets and investments.
• in September 2020, the Commission’s Inception Impact Assessment noted three key areas where the ELTIF regime could be improved:
  • on the supply side - improving the fund structuring aspects of the ELTIF framework and considering the existing limitations on what assets ELTIFs can invest in and on how much they can borrow;
  • on the demand side - removing barriers to investment, such as the requirement for an appropriateness test and an initial investment limit of EUR 10,000; and
  • the introduction of tax incentives by Member States to promote investment in ELTIFs.
• on 19 October 2020, the Commission published a consultation paper seeking views on a wide range of issues, including (i) the investment universe, eligible assets and qualifying portfolio undertakings, (ii) types of investors and effective investor protection, (iii) borrowing of cash and leverage, (iv) portfolio composition and diversification rules, (v) redemption rules and life of ELTIFs and (vi) marketing strategy for ELTIFs. The consultation period closed on 19 January 2021.
• finally, on 3 February 2021, ESMA published a letter to the Commission, in which it highlights the key topics of the ELTIF review where it feels amendments are needed.

Accepting that the ELTIF has not to date been wholly successful, ESMA considers that bringing such funds more into line with the investors’ needs (retail and professional) would make it a more attractive vehicle. At the same time, ESMA argued that the ELTIF review should aim to achieve the right balance between (a) encouraging retail participation and (b) ensuring adequate standards of investor protection.

Based on feedback received to its public consultation, the Commission has indicated that it intends to adopt a legislative proposal for a Regulation to amend the ELTIF Regulation during the course of 2021.

We will be following developments with the review closely and will report again when the Commission’s legislative proposal has been published.

For part two of this Note, in which we look at the current regulatory and commercial position in respect of ELTIFs in France, Germany, Ireland, Italy, Luxembourg and the Netherlands, please see here.