The revised European long-term investment fund regulation entered into application in January, aiming to make the Eltif a more effective tool to channel capital into the real economy and to democratise access to private markets, said Tanguy van de Werve, director general of the European Fund and Asset Management Association in his introduction to a webinar organised by Efama and law firm Arendt on 18 June 2024.

The Eltif regulation first came into effect in 2015, but it had a rocky start and saw little uptake. “Since the review was announced, we have seen major growth in the Eltif sector, as compared to the first six years of this product’s existence,” said van de Werve. In 2021, there were 57 Eltifs with roughly €2.7bn in assets under management; today, there are are over 100 Eltifs and assets under management have jumped to an estimated €13.6bn. “We also see new domiciles emerging, as well as new asset managers entering the space. We expect these figures to grow even further, once the final piece of the puzzle has been put in place: namely, the Level II rules, which we expect will enter into force by the end of this year.”

There are some 80 Eltifs domiciled in Luxembourg, noted , partner at Arendt & Medernach and head of the New York office during a discussion with Efama regulatory policy advisor Gwen Lehane, and it remains the leader for pan-European distribution. “In terms of strategies, most Eltifs follow a private equity strategy, but we find also private credit, infrastructure, real assets and a lot of mixed structures, including nowadays also fund-of-fund structures, because it is possible under the new regime to have, under certain conditions, also fund-of-fund investments.”

Initially, managers launched closed-ended Eltifs, Staedter added. “But now, the time has changed, and managers look for a certain sophistication in the product because retail investors need liquidity and they need to meet liquidity demands with the semi-liquid products.”

Suitability test and more transparency for retail investors

“The Eltif has been described as being a bridge between the Ucits and the AIF as a way to democratise private assets,” said Lehane. What are some of the conditions retail investors have to satisfy to access this type of fund?

A “suitability test” will need to be performed to ensure that the investor has the required knowledge about the product, the financial needs and whether the investor could suffer potential losses, said Staedter. There’s also no minimum ticket size and no maximum investment size. “It’s much easier on the marketing side to reach out to investors, provided that the relevant AIFM or distributor are performing the Mifid test.” A written alert that informs the investor that an Eltif may not be suitable for retail investors who are unable to sustain a long-term commitment is another requirement.

“On the retail protection side, we should note that there are several transparency rules to be complied with,” Staedter added. The Eltif prospectus includes more information, for instance, and there’s also a requirement to produce Priips Kid, or packaged retail and insurance-based investment products key information document. A “cooling-off” period also applies to the purchase of Eltif units.

Rules on exit/redemption

“The new rules also made changes to when an investor can decide to exit the fund, which will make the Eltif more practical and attractive to investors, in particular retail investors,” argued Lehane, bringing the discussion to the new redemption provisions.

“Most Eltifs under the previous regime were closed-ended, but article 18, paragraph 2 has already allowed in the past to provide for the possibility of early redemptions,” Staedter replied. “Now we can see that there is more and more appetite around semi-liquid provisions.”

Some of the conditions in the regulation include: redemption requests may be satisfied only from the pocket of liquid assets; no redemptions are permitted before the ramp-up or minimum holding period ends; a redemption policy and liquidity management tools must be in place, compatible with the Eltif’s long-term investment strategy; and the redemption policy must clearly indicate procedures and conditions for redemption.

The “matching mechanism,” whose use is expressly provided for in the revised regulation, is another way for investors to exit an Eltif. It permits the transfer of shares between existing and new investors.

Tax considerations and national incentives

When it comes to taxation, there are no harmonised tax rules across the EU, but some member states have been “active” and have put in place regimes that grant some advantages. “One good example is, for instance, Italy,” said Staedter. Investments in Eltifs that meet the requirements of an individual savings plan provide Italian tax resident investors with an exemption for capital gains and inheritance tax. “But in order to qualify for such an exemption, investors must maintain a minimum holding period of five years and need to make investments within specific thresholds.”

Another country-specific example is seen in France. Where Eltifs are purchased as part of a unit-linked life insurance policy and held for more than eight years, then income tax is not levied on reinvested capital gains. Certain regions in Spain have also implemented special tax regimes for Eltifs. These initiatives could serve as “inspiration” for some other countries, noted Staedter, but a downside is that this creates a sort of “competition.”

There are other initiatives that aim to make the Eltif more attractive, he added, including lower capital charges or actively involving the Eltif in the creation of a savings and investments union, which could “potentially require member states to provide for more attractive tax regimes for certain products.”

“The outlook, from my point of view, for the future of the Eltif seems to be very positive. The amendments under the Eltif regulation have been welcomed by the asset managers industry. Now it’s important to keep the same drive for the regulatory and technical standards and to bring it positively over the line.” 

This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .