ELTIF 2 RTS 0 – a new regime kicks off (without its Level 2 measures)

Without, it has to be said, a huge fanfare, the ELTIF Amending Regulation came into effect on 10 January 2024.

This amends the ELTIF Regulation (now called ELTIF 2) with the aim of increasing flexibility and investment opportunity, while ensuring the ELTIF remains a safe vehicle for retail investment.

Our summary of the changes made can be found here

Grandfathering provisions mean that ELTIFs authorised before 10 January 2024 benefit from a transitional 5 year period and must comply with the ELTIF Amending Regulation by 11 January 2029.

However:

• managers of existing ELTIFs may, subject to certain conditions, choose to opt into the ELTIF 2.0 regime, though this is subject to the ELTIF's competent authority having been notified and having approved the opt in.

• an ELTIF which was authorised before 10 January 2024 and which does not raise additional capital will be deemed compliant full stop.

Even at its outset, though, trouble may be brewing - rumours are circulating that there may be problems in approving the Level 2 measures which underpin some of the key provisions.

Regardless of what the end result is, it's already clear that there will be a reasonably healthy gap between the new regime being in place and industry knowing what the Level 2 measures they will need to comply with look like.

What changes does the Amending Regulation make?

The key new provisions include

Broadening the scope of eligible investment assets

In particular

• simplifying the definition of "real assets" and removing the existing EUR 10 million threshold to qualify as a "real asset"

• permitting investment in simple, transparent and standardised securitisations and European green bonds

• increasing the market capitalisation threshold for listed portfolio undertakings from EUR 500 million to EUR 1.5 billion and

• removing the prohibition on investing in an authorised or registered financial undertaking which is less than five years old as at the date of the investment (though this does not apply to (a financial holding company or mixed-activity holding company).

Portfolio composition, concentration limits, diversification thresholds and borrowing powers

The Amending Regulation has (among other things)

• lowered the percentage of its capital that an ELTIF must invest in eligible investments from 70% to 55%;

• increased (from 10% to 20%) the percentage of its capital that an ELTIF can invested;

  • in any single qualifying portfolio undertaking and / or;
  • in any single real asset;

• increased (from 5% to 10% of the ELTIF's capital) the aggregate risk exposure to a counterparty arising from OTC derivative transactions, repo agreements, or reverse repos;

• increased (from 25% to 30%) the concentration limit of the shares of a single ELTIF, EuVECA or EuSEF which an ELTIF can acquire and extended the scope of the limit to include UCITS and EU AIFs (though these measures don't apply to either (a) an ELTIF marketed only to professional investors or (b) a feeder ELTIF investing in its master ELTIF);

• increased the amount of cash an ELTIF can borrow (from 30% to 50% of the ELTIF's NAV) - this is increased to 100% where the ELTIF is marketed only to professional investors.

Structuring

• an ELTIF will be able to be structured as essentially open-ended, since the new regime eases the redemption provisions in the original ELTIF Regulation - these, though, remain fairly tough and the market may take the view that an ELTIF is better suited to a closed-ended than an open-ended fund structure.

• ELTIFs may now allow redemption of units during the life time of the fund provided a number of conditions are met, including the ELTIF having an appropriate redemption policy and liquidity management tools.

• an increase (to 100%) of the maximum limit that an ELTIF can invest in other EU AIFs other than ELTIFs and UCITS allows for fund-of-funds structures for retail ELTIFs - however, both the master and the feeder have to be ELTIFs.

Minimum investment limit

• the €10,000 minimum investment requirement and the cap of 10% for retail investors whose financial instrument portfolio does not exceed €500,000 have both been removed.

Level 2 problems

The Amending Regulation required ESMA to develop level 2 RTS on a number of issues.

ESMA consulted on its proposals in May 2023 - see our summary of its consultation paper here.

On 19 December 2023, it submitted its Final Report to the European Commission.

The Final Report contained ESMA's draft RTS for adoption by the Commission and subsequent endorsement by the Council of the EU and European Parliament.

Our summary of the Final Report can be found here.

The draft RTS included, among other things, provisions whereby

• an ELTIF would have a maximum quarterly redemption period, though an ELTIF manager can deviate from this if it is able to justify this to the ELTIF's NCA; and

• redemptions would only be permitted where there is a notice period of 12 months - however, exceptions to this rule would be allowed based on the minimum percentage of liquid assets. So, where an ELTIF has a notice period of less than six months, the ELTIF manager must ensure that at least 40% of the ELTIF's AuM is invested in liquid assets.

It would seem that different national regulators around the EU had different views as to the risks of retail investor exposure to less liquid assets. Certainly, from our own discussions with clients, there is concern that the requirement to maintain a higher amount of liquid assets will lead to lower investor returns - meaning that the ELTIF, as a brand, could remain commercially unattractive.

The balance between, on the one hand, allowing retail investors to access less liquid assets while, on the other hand, ensuring they are appropriately protected is always a tricky one to strike and it is unclear as things stand whether the Commission will adopt ESMA's proposed RTS as they are, in part only, with amendments or not at all. And a decision on this doesn't seem imminent.

In the meantime, the new ELTIF regime is up and running but the technical measures meant to underpin it seem to be several months away, at least.