Mariusz Wiese, managing associate at Linklaters’ global investment funds practice in Luxembourg discusses with Delano the new opportunities and challenges presented by the upcoming Eltif 2.0 regulation, which is set to come into force on 10 January 2024. He specialises mainly in regulated and unregulated alternative investment funds (AIF) with a particular focus on European long-term investment funds (Eltifs), real estate and private equity funds.
Wiese told Delano during an interview shortly before the new rules took effect that he remains optimistic about the upcoming regulation, stating, “We can be sure that there is a great future ahead for Eltifs. We must now make every effort to allow it to fully take off.”
Kangkan Halder: Could you explain the key differences between the original Eltif framework and the Eltif 2.0?
Mariusz Wiese: I would not be myself if I did not start with a bit of history. The first version of the Eltif regulation entered into force in 2015 and although it was welcomed, uptake was slow, and enthusiasm limited. While opening up alternative investments to retail investors at the European level was an attractive concept, generally strict requirements aimed at enhanced investor protection eventually rendered the original Eltif label largely unfit for purpose from the perspective of many sponsors and investors. Although several Eltifs were launched, Eltif 1.0 did not meet expectations and the revised Eltif 2.0, entering into force on 10 January 2024, fixes many of the perceived flaws of its predecessor.
Changes are significant and highly technical--but in short--the new Eltif 2.0 is clearer and more flexible, allowing fund sponsors to more easily achieve their aim of designing products that answer their clients’ demands without exposing them to excessive risk.
Amongst the most crucial amendments, Eltif 2.0 features less stringent diversification rules, easements to the borrowing policy and leverage limits, simplified distribution provisions; it also significantly widens the scope of eligible investments. Investor protection safeguards have been aligned with other European regulations, most notably with Mifid II and AIFMD requirements, making the distribution process easier to manage.
With the eased eligible assets criteria, real estate asset managers will likely start looking at Eltifs as an interesting opportunity to revive this asset class in the coming months.
How do you anticipate Eltif 2.0 will impact fund structures and investment strategies?
We can be certain that new structures and strategies will arrive to the Eltif universe. Eltif 2.0 opens the field to new products, in particular more open-ended Eltifs or Eltifs following fund-of-funds strategies. We can already see a huge interest in fund-of-funds Eltifs, which allow asset managers to offer retail investors access to their existing alternative funds portfolio. The open-ended Eltifs with periodic redemption rights and harmonised matching mechanism could be an attractive option for investors who require a higher level of liquidity and flexibility in terms of the duration of their investment. It also allows asset managers to launch flagship Eltifs and build up their portfolios for years.
I also expect to see a continuing trend in direct co-investments alongside existing structures with the rules around co-investments and conflicts of interests clarified in the revised regulation.
We can additionally expect to observe increased interest from sponsors active in asset classes that were historically less interested in Eltifs. With the eased eligible assets criteria, real estate asset managers will likely start looking at Eltifs as an interesting opportunity to revive this asset class in the coming months.
The final text of the level 2 regulation supplementing Eltif 2.0 regulation is being discussed at present. This will impose detailed provisions on redemption requirements and their liquidity profile. The outcome of these discussions will determine the future of open-ended Eltifs in particular.
What are the practical implications of Eltif 2.0 for asset managers, and how should they prepare for these changes?
The goal of the revised Eltif regulation was to ultimately make things easier for asset managers, their distributors and, finally, investors. Hence, I would say that there is nothing to be particularly worried about with the Eltif 2.0 in comparison to the previous framework.
However, some practical challenges remain in place. As an example, there are jurisdictions in which Eltifs are not allowed to invest due to their AML or tax cooperation deficiencies. The concept of a fund-of-funds tends to be misunderstood as well, with some asset managers envisaging investments in any type of alternative investment funds, while only EU-based AIFs would meet the eligibility criteria. This proves difficult for global asset managers who would like their Eltifs to invest in their global offering, including in Delaware, Asia or other offshore products. This unfortunately would not work for an Eltif 2.0. The same issue would arise with secondary fund-of-fund Eltifs.
Finally, many alternative fund managers are not used to working with retail investors, which implies additional regulatory, operational and relationship challenges. The solution is to appropriately design their distribution channels and put in place all necessary processes or partner up with experienced distributors, nominees or intermediaries to make sure that accepting retail investors to their “alternative” world is a smooth process.
My main advice to asset managers considering launching a new Eltif is ‘be prepared and mindful of your obligations’. While certain challenges and restrictions are unavoidable for a regulated product, by putting in place operational safeguards and being aware that some operations simply cannot be done, they can make the launch of their Eltif product a fairly standard fundraising experience.
Many of us truly believe that Eltifs could finally bridge the gap between the world of Ucits and alternative investments.
In your view, what potential opportunities does the new Eltif 2.0 regulatory framework open up for innovative funding and investment vehicles?
There is general excitement about Eltif 2.0 and it is difficult to find a seminar or a conference these days where it isn’t one of the key topics. With many sponsors having new Eltifs in the pipeline and only waiting for the new rules to enter into force, I expect we would see launches of several new Eltifs in the coming months.
A hugely underserved base of sophisticated retail investors opens up to private markets and asset managers will finally be able to offer them products that balance an opportunity for interesting returns without compromising investor protection. Money that those retail investors would until now keep in their bank accounts or invest in public markets--be it via undertaking for collective investment in transferable securities (Ucits) or directly--can now be streamlined towards private assets, offering a completely new source of funding. Seeing a slight slowdown in private markets in the past months due to a more challenging global macro environment, injection of such funding could help them thrive again.
Having a strong, recognised label at the European level could further increase the knowledge about investment funds amongst citizens who normally do not have much in common with financial markets. There is hope that the Eltifs could strengthen the EU economy and attract investors from around the world. Many of us truly believe that Eltifs could finally bridge the gap between the world of Ucits and alternative investments.
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What are the critical considerations for funds to ensure compliance with Eltif 2.0 and to harness its benefits effectively?
The fact that Eltif 2.0 requirements have been significantly loosened in comparison to Eltif 1.0, does not mean that everything is now possible and the Eltif will become yet another AIF that asset managers are so used to. Eltif remains a highly regulated product with important investor protection safeguards in place. Asset managers should be mindful of that when planning to launch a new Eltif.
However, as with most challenges, there will almost always be an appropriate solution. Your fund-of-funds strategy does not work? Consider a co-investment strategy alongside those funds directly into the target assets. Liquidity profile is too stringent? Maybe you can think of adapting the redemption policy. These are the discussions we are having with our clients almost every day.
Ultimately, launching an Eltif resembles any other fundraising. Asset managers will need to find the right balance between its interests and investor needs, and design a product that will check all the regulatory boxes while remaining profitable and marketable.
From observing how many asset managers have been thinking about launching an Eltif or have already added one or several to their portfolio, we can be sure that there is a great future ahead for Eltifs. We must now make every effort to allow it to fully take off.