The text concerning amendments on the European long-term investment funds (Eltifs) regulation, which entered into force in 2015, was approved by the European Parliament’s committee on economic and monetary affairs on 12 January 2023, with a vote scheduled for 13 February. Eltifs are funds that invest in assets such as energy and communications infrastructure, transport, public buildings or social infrastructure, and can be distributed across borders.

“We knew already the features, of course, but it was more internal. You got it by discussions, and you got it described by institutions,” said , investment manager partner at Arendt, who has been involved in roughly 65% of existing Eltifs in the grand duchy. “But, I mean, to see them and to touch the text is a different feature.”

So what’s new in the amended regulation?

The amendments make it easier to invest in Eltifs, include a wider scope of eligible assets and qualifying portfolios, and make it easier to channel more financing to small businesses, said a newsflash published by Arendt on 16 January. It also promotes investor protection and simplifies distribution.

“Access to assets will be much simpler, because you can invest now also in other funds as a target,” said Staedter. “Before, it was more direct investments, meaning you invest in private equity, you follow a private credit strategy. But here, it will now be possible to invest in EU alternatives, which are managed by EU AIFMs [alternative investment fund managers].”

“And this is new: when you want to have a fund of fund strategy, then you are limited to EU funds.” Institutions want to prevent the use of Eltifs offshore. “That’s why they insisted on EU alternatives which are managed by EU AIFMs, by EU asset managers, in order to make sure that there is not a risk for the investor protection,” said Staedter.

More real assets and green investments

With the new Eltif regulation simplifying the definition of real assets, Staedter also anticipates seeing more and more “real assets,” meaning real estate and infrastructure projects. The definition of real assets was very complicated before--real estate needed to be “labelled.”

“This was not coherent and consistent with the SFDR [Sustainable Finance Disclosure Regulation] ESG approach from the European Commission, so there was a little bit of, I would say, a mismatch between the two,” explained Staedter. “And this created, of course, uncertainty. And asset managers don’t like uncertainty.” This made it difficult to implement a real asset strategy in an overall, global strategy. “This is now over. The definition has been completely simplified,” he said.

“The other point was always there was a minimum value,” added Staedter. “Your real asset needed to have €10m, which is difficult, especially if you are investing in the new energy,” such as solar panels or wind energy, which may be less than €10m. This is no longer the case--the redesigned Eltif removes the minimum threshold for real estate strategies. “I think there is nothing more which would be in the interest of the European Commission than promoting this type of product,” he said.

Removal of the “entry ticket” increases retail investor access

The new regulation also removes the “entry ticket,” meaning a minimum investment holding of €10,000 and 10% exposure cap for retail investors whose financial portfolios are below €500,000.

Retail investors used to need to have a minimum portfolio of liquid investments of €100,000, and were “forced” to invest €10,000 in a single Eltif, with the logic being that if an investor were “forced” to invest such a sum, they would think twice, explained Staedter. But someone who had €500,000, for example, would be theoretically able to invest €1.

This was a bit of an “absurd” result, said Staedter, as it obliged investors to invest more than they may have wished to in a single fund. Investors may have, for example, wished to invest €5,000 in one Eltif and €5,000 in another Eltif in order to diversify--a logical move. But the regulation forced investors to put it “all on one horse.”

“From this point of view, this is now the past,” said Staedter. “In the future, you will not have any minimum from an Eltif perspective. It could be that you have a product requirement.” In Luxembourg, for example, to invest in a Raif (reserved alternative investment fund), a Sif (specialised investment fund), or a Sicar (société d’investissement en capital à risqué, a capital risk fund), one needs “the well-informed investor status.”

But others do not have eligibility criteria--theoretically, one could invest €100 in a product, so long as an investor passes the “suitability test” with a distributor. The suitability test always existed; before, however, it was more Eltif-specific, explained Staedter. But specificities create costs. With the new Eltif regulation, the Eltif suitability test has been aligned with that of Mifid II (markets in financial instruments directive).

This “makes life very easy and convenient for the distributor,” said Staedter. They’re familiar with the framework and can apply it to this new context. “From the investor perspective, I think it’s a gain,” he continued. “For the distributor, it’s a gain.”

Strengthening Luxembourg as a distribution centre

The Eltif 2.0 is a reform for the distributor as well. “I think this is strengthening the distributor, and they get clarity, which is a good thing,” said Staedter, especially for Luxembourg and its intention to become the centre of distribution. 48 Eltifs--57% of the 84 Eltifs launched in the EU as of January 2023--are domiciled in the grand duchy.

Staedter spoke on a panel in Prague in December 2022 and noted the keen interest of central Europe in the topic of Eltifs. “It’s the same in Italy. Whenever you go to Italy and you say the word Eltif, everyone knows what is an Eltif,” said Staedter. “It’s a new normal.” France is also very motivated for Eltifs, but it’s domestic, said Staedter. “It’s rare that a French Eltif will actually be distributed outside of France, the same for Italy.”

“But Luxembourg, really, you can see on average 10 countries of distribution, which is, I mean, which is incredible,” said Staedter. “And since this month [editor’s note: this interview was conducted in January], also Norway--so a country outside of the EU, but part of the EEA--is now dealing with Eltifs,” he said. “You can actually now distribute to Norway, you can distribute to Iceland, you can distribute to Lichtenstein. They all are part of it. So there are new markets from an Eltif perspective.”

Timeline

It’s expected that the European Parliament will vote in favour in February, said Staedter, and “it would be a surprise if there is a red flag coming up.” Final publication in the EU’s official journal is therefore anticipated for March 2023, and the revised Eltif regulation is expected to enter into force 20 days later--in April 2023.

“You need to apply the new rules actually nine months later, which brings us to January, February 2024,” explained Staedter. “If you are open-ended or if you are still marketed, you will get a grandfathering period of five years.”

That being said, it will be possible to “opt in” earlier. There is the possibility to “notify your regulator that you want to make use already of the new regime,” said Staedter. “Which means, technically speaking, that you could, as of April this year--depends a little on the publication and the 20 days--already make use of the new regime.”

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