The European Commission’s to the European long-term investment funds (Eltifs) are crucial in unlocking private market strategies for a broader array of investors amidst financial uncertainties, according to Michael George, lead portfolio manager at M&G’s Corporate Credit Opportunities Eltif Fund.

In a client note, shared with Delano, George said that the commission’s initiative to refine the regulatory framework for Eltifs by proposing several amendments aimed at enhancing liquidity requirements, notice periods and cost disclosures. This proposal, submitted to the European Securities and Markets Authorities (Esma), has piqued the interest of various market participants, signalling a potential shift in the private market investment strategies landscape across Europe.

Private credit

Acknowledging the ongoing uncertainties in interest rates and inflation, George believes that private credit has emerged as an attractive source of stable and floating income. The revision of Eltif regulations, dubbed Eltif 2.0, is set to significantly democratise access to private markets for European investors. This development is particularly pertinent given the growth of private markets post-global financial crisis, which until recently, were largely out of reach for individual investors due to regulatory constraints.

Eltifs--introduced to stimulate investment in Europe’s real economy--channel capital towards essential sectors such as corporates, infrastructure and real estate. George expects the regulatory updates to bridge the pension and public funding gap in Europe, highlighting the essential role of small and medium-sized enterprises in sustainable economic growth.

Eltif 2.0, effective from 20 January 2024, marks a significant evolution from its 2015 inception, remarked George, primarily through reduced minimum investment thresholds and expanded asset eligibility criteria, aimed at enhancing the vehicle’s appeal to a broader investor demographic. This includes offering regulated access to private assets and fostering cost-efficient portfolio management across the EU.

Investor due diligence

However, George noted that despite broader inclusion, Eltif 2.0’s modifications necessitate investor diligence in fund selection to fully leverage the benefits of private asset diversification. The changes encourage alignment of interests between managers and investors through more transparent cost structures and standardised management frameworks. He also highlighted the widened definition of eligible assets and the reduction of the minimum investment in eligible assets from 70% to 55%, with public assets now potentially making up to 45% of the portfolio. The removal of the original minimum investment allocation of €10,000 was also noted as a significant alteration.

Taking note of the ongoing evolution of private markets, George emphasised the importance of selectivity and experience in navigating the private credit landscape. The attractive yields and the dynamic interest rate environment present opportunities and challenges, but careful diligence needed particularly for companies with limited financial flexibility. He argued that the expanded access to private markets through the new regulations underscores the need for enhanced financial education to empower investors to make informed decisions tailored to their investment objectives.

Growth potential

With approximately €16bn in assets under management, Eltifs stand on the verge of significant growth potential, especially when compared to the €13trn in AUM in undertakings for collective investment in transferable securities funds. George sees the shift towards Eltifs and semi-liquid investment vehicles as reflecting a broader market trend towards diversification, liquidity and accessible investment in previously exclusive asset classes.

The portfolio manager also commented on the retrenchment of banks, particularly evident in the US over the past decade and increasingly in Europe, presenting further growth opportunities for Eltifs. This trend facilitates a shift towards capital market financing, highlighting the resilience of market-leading companies owned by private equity in navigating economic cycles.

George concluded that comparative analyses between private credit and other sub-investment-grade asset classes in Europe, such as the European high-yield bond market, reveal the superior risk-reward profile of private credit investments. The performance of private credit, with almost 10% returns over the past decade compared to 3.5% in the European high-yield sector, exemplifies the compelling investment proposition offered by the evolving Eltif framework.