As part of this series, we asked , investment funds partner at the law firm Clifford Chance, about how Eltif 2.0 would impact Luxembourg, and, in particular, improve investor protection.
Henrion told Delano:
“The objective of Eltif 1.0 to allow retail investors to participate in the long-term financing of infrastructure projects and other eligible assets and thereby to contribute to the financing for the European real economy was the right idea and still is. But in view of the disappointing development of the assets under management (€2.4bn in 2021) it cannot be denied that a revision of the Eltif 1.0 regime is needed.
“Eltif 2.0 definitively presents a better investment proposition, i.e., it is more flexible and more straightforward.
“On the supply side, Eltif 2.0 imposes less constraints to investment managers, e.g., it comes with a broader set of eligible investments no longer restricted to infrastructure assets, the possibility to invest in non-EU assets, the possibility to pursue concentrated investment strategies, the possibility to implement fund of funds structures and co-investment strategies, the relaxation of borrowing restrictions.
“On the demand-side, Eltif 2.0 removes the €10,000 initial minimum entry ticket, the 10% investment limitation in relation to the investor’s financial instrument portfolio and the ad-hoc Eltif-specific suitability test for retail investors.
“The EU marketing passport allowing a pan-European distribution to retail investors under Eltif 2.0 is a unique investment proposal in terms of funds investing in real assets. Through the passport, retail investors can benefit from the premium generated by real (illiquid) assets in comparison with liquid assets. It is worth noting, however, that Eltif 2.0 will not be totally innovative in the sense that Eltif 2.0 will fit into the existing ‘retailisation’ trend the Luxembourg fund industry has been witnessing over the last two years, especially with the revival of the Part II UCI under the Luxembourg 2010 Law.
“The higher return expectations of alternative investments are one important aspect, the other being the liquidity offered by the Eltif (or lack thereof). By nature, an Eltif is in principle closed-ended, meaning it does not offer redemption facilities to investors during the life of the fund. However, retail investors typically feel more comfortable with liquid investment products. There is thus clearly a tension which is inherent to the Eltif product when it is targeting retail investors.
“Eltif 2.0 might be structured with a view to offering more flexible redemption provisions during the life of the Eltif, but the terms of such redemption facility are still to be determined by Esma [European Securities and Markets Authority] so that there remains a question mark behind the ‘open-ended Eltif 2.0’ at this stage.
“The EU authorities are fully aware of that tension. On the one hand, various EU initiatives--including Eltif 2.0 and AIFMD 2--aim to facilitate the access of (semi-)retail investors to alternative strategies and real assets. On the other hand, the EU authorities are focusing more than ever on liquidity management tools with a view to guaranteeing the effectiveness of redemption facilities. That tension can be contained but will always exist to some extent from the moment the investment proposal is about transforming illiquid/real assets into a (partially) liquid investment product.
“Retail investors, however, do not necessarily invest directly into financial products and one can reasonably expect this will also be the case with the Eltif 2.0.
“Hence, if attractive distribution channels targeting ultimately retail investors can be identified, that will likely be a major driver for the success of Eltif 2.0 (including Eltif 2.0 structured as closed-ended funds).
“Whereas Luxembourg is a domicile of choice for any pan-European fund, it is yet to be seen how the indirect distribution of Eltifs to retail investors in the major EU countries will be structured. In other words, whether there will be a significant number of Eltifs 2.0 established in Luxembourg will mainly depend on the availability of distribution channels in France, Germany, Italy and Spain. The following are promising indicators of potential local solutions:
-France may offer opportunities in the context of the coming reform of the ‘Code français des assurances’ in relation to ‘Contrats d'assurance-vie en unités de compte’;
-Germany has a track record of (semi) open-ended/closed-ended funds investing in real assets and open to retail investors (subject to conditions); and
-moreover, investments in Eltifs can be initiated or proposed by the private banking subject to the Mifid [Markets in Financial Instruments Directive] suitability test.
“In conclusion, whereas the changes to the Eltif regime are rightly expected to lay a robust foundation for the future success of the Eltif in Luxembourg and beyond, the success of the Luxembourg Eltif 2.0 will depend even more on the availability of attractive distribution channels in the main EU countries into which they will be passported.”
Henrion stated: “Similarly, the extent to which the Eltif 2.0 offers a sufficient level of investor protection does not only depend on the Eltif’s intrinsic features--i.e., eligible assets and quantitative limitations--but also on the distribution channels used to reach retail investors.”
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