In recent years, we have witnessed efforts at the EU level to further develop the Capital Market Union (CMU) with the aim of facilitating cross-border investments and unlocking access to capital. In a specialist report to the EU Council, Mr Enrico Letta noted that in the EU, there are 33 trillion euros in private savings, mainly held in currency and deposit accounts.
The European long-term investment fund (ELTIF) is expected to play a large part in the CMU objective, enabling AIFMs to market ELTIFs/AIFs in the EEA with passports to both retail and professional investors.
Yves Elvinger, Partner Investment Funds at Elvinger Hoss Prussen says:
The published final regulatory technical standards (RTS) under the revised ELTIF Regulation have provided workable (albeit complex) liquidity rules for ELTIFs and have confirmed that the latter are a suitable vehicle to structure evergreen funds.
Evergreen standard for all asset types
Evergreen funds that have been launched in the last few years share common features that have since become standard. First of all, they accept fully funded subscriptions generally on a monthly basis and at NAV. They also offer some liquidity to investors by allowing redemptions, generally on a monthly or quarterly basis at NAV subject to a limit of 3% to 5%, and finally, they target all types of assets including real estate, private debt, private equity and funds. Managers of all scales have already launched their evergreen vehicle.
Part II funds are often used by managers before or in combination with an ELTIF. Part II funds are not new (they may be traced back to 1983) but they have gained the trust of sponsors and regulators around the world.
Joachim Cour, Partner Investment Funds at Elvinger Hoss Prussen adds:
Part II funds have been modernized and an ELTIF can be set up as a Part II fund. The combination of an ELTIF and a Part II fund offers an efficient and attractive way of approaching the private wealth market.
Setting the right redemption limits for your ELTIF
Redemptions on a given redemption date are limited to the sum of the portion of UCITS eligible assets at the redemption date, and the expected cash flow forecast on a prudent basis over 12 months.
There are two methods for determining the maximum percentage of redemptions at a given redemption date under the RTS, as specified in the annexes of the ELTIF Regulation ().
The first method determines the maximum percentage as a function of the redemption frequency and the notice period, whereas the second method determines it as a function of the redemption frequency and the minimum percentage of UCITS eligible assets.
While each method has its merits, managers tend to use the first method, which does not directly impose a minimum of UCITS eligible assets.
The Elvinger Hoss ELTIF calculator and term sheet generator
Setting up an ELTIF can be challenging for managers, and an evergreen fund only adds to the complexity as redemption limits must be precisely calculated (i.e. notice, frequency, liquidity etc.).
In order to assist managers with the first steps of an ELTIF project, Elvinger Hoss Prussen now provides a web-based that allows the automatic generation of a first term sheet for an evergreen ELTIF. The generated term sheet may then be used by managers to further conceptualise the project.
The Elvinger Hoss ELTIF calculator and term sheet generator (Photo: Elvinger Hoss Prussen)
The calculates, in particular, the redemption limits that will apply to the ELTIF based on set criteria, which facilitates for instance the conversion of a limit applying to the liquidity pocket back into the global NAV of the fund. The is available on our website at .
At Elvinger Hoss, we strongly believe in the ELTIF vehicle and wish to offer efficient, accurate and digitalised support to sponsors with this calculator tool.
Compromises and opportunities for alternative managers
The main advantage of ELTIFs over Part II funds is that they allow all investors to benefit from an EU-wide marketing passport. However, managers need to be mindful of the investment limitations and asset eligibility requirements, which requires an in-depth assessment of the contemplated strategy and portfolio of assets. Moreover, the prescriptive rules governing the liquidity terms need to be assessed with caution.
Sponsors that already manage retail vehicles (often UCITS) are accustomed to the product-type restrictions contained in the ELTIF, and will generally struggle less to adapt to those limitations than sponsors who are used to managing closed-ended alternative funds for institutional investors.
Often, the ELTIF restrictions will prevent such a sponsor from packaging their flagship strategy into an ELTIF format. This is where Part II funds, although they may not benefit from a marketing passport to retail investors in the EEA, remain a suitable alternative for managers whose strategy cannot accommodate the ELTIF restrictions, and require more flexibility.
However, Joachim Cour and Yves Elvinger conclude: “the size of the private wealth market worldwide and the investors’ appetite for alternative strategies are driving innovation, and alternative managers may consider structuring an ELTIF alongside a Part II ‘flagship fund’, to offer a co-investment type vehicle with a subset of their strategies and portfolios that can meet the ELTIF requirements.”
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