In a research note published on 22 October 2024, Scope reported that the launch of authorised European long-term investment funds or Eltifs has accelerated to 36 for 9M24 (with 27 domiciled in Luxembourg). That’s up from 20, 18 and 27 for the full year in 2023, 2022 and 2021, respectively.

Scope also noted that most of the launches are classified as private equity, private debt and infrastructure.

The hard reality of AUM

Paperjam experienced that finding data about assets under management is much more challenging. In July 2024, extracted assets under management from a Scope report published in May 2024, which estimated fund volume at the modest level of around €13.6bn at the end of 2023, compared to €2.7bn in 2021.

Scope expects more Eltifs launches in 4Q24 but “the total Eltif volume in 2024 will not be significantly higher than in the previous year.”

Admittedly, the Eltif 2.0 regulation has been applicable only since 10 January 2024. Moreover, it is reported that many asset managers waited for a .

It could be argued that one must give the product a chance to prove itself. Yet many in the market think that that product is ill-advised for retail investors, as reported and . Therefore, it remains to be seen whether assets under management will follow the optimism of fund promoters as reflected by the number of fund launches.

Moody’s pointed out a few challenges that Eltifs will encounter, which may prevent an acceleration of sales.

Little evidence on performance

The rating agency suggested that investors’ interest in Eltifs “will largely hinge” on the funds’ performance. It noted that publicly available performance data is currently scarce, and many funds have a short track record.

High fees but relatively cheaper

Moody’s is concerned that “high management fees” on the back of the complexity of fund management (regulation requirements, liquidity management, etc.) will negatively impact net performance. Consequently, smaller asset managers are expected to be “disproportionally affected.”

Yet in a written statement, Moody’s commented that PE funds “usually” have a 2%/20% management/performance fee structure against a 1%-2.5%/10-20% format for Eltifs. “So Eltifs are usually less expensive in terms of costs than PE funds,” wrote Guillaume Lucien-Baugas, vice president, senior analyst at Moody’s Ratings.

State contribution

Given the perceived risks and liquidity requirements compared to listed assets, Moody’s thinks that tax incentives offered by specific EU members may be quite important in drawing in retail investors.

Questioned on countries offering the largest/smallest tax incentives, Lucien-Baugas only commented about France, where “some Eltifs can be bought into the PEA-PME [retail savings products with a limit of €75,000] and have a tax exemption on capital gains after 5 years.” No additional insight was provided for Luxembourg.

  Distribution may be a bottleneck

The success of Eltifs will also greatly depend on the distribution plans of asset managers. Moody’s thinks that reaching individual investors will depend on the prompt integration of Eltif offerings into life insurance policies and other investment vehicles. However, the credit rating agency observed that some investing platforms are still ill-equipped to handle Eltif transactions, which may potentially hinder expansion and delay the distribution of these funds.

Lucien-Baugas reported to Paperjam that that will be sold into its life contracts. He said: “French insurers will have to offer a ‘managed contract’ in which a proportion of long-term assets will have to be included, typically Eltifs. Same thing for pensions,” referring to ‘plans epargne-retraite,’ or individual retirement savings accounts.

Moody’s pointed out that only five countries (Luxembourg, France, Italy, Ireland and Spain) have domiciled Eltifs which are generally commercialised across many EU countries.

Will Eltifs tick the “value for money” box?

Moody’s thinks that it is possible that some life insurers and asset managers will be wary to aggressively sell their Eltifs to retail investors. Indeed, the adverse consequences of mis-selling risks and the current focus of EU authorities on ensuring “value for money” are real concerns for the asset management industry.

Lucien-Baugas told Paperjam: “Transparency, compliance and suitability requirements are strict. This is also a product built by the European Union to bring retail savings into long-term assets. So, I reckon there are good reasons to think that there will not be large penalties linked to the [mis-] sale of these products.”