The concept of democratisation of private asset investments, also known as “retailisation”, may get an additional boost in 2023. The adoption of the Eltif 2.0 (European Long-Term Investment Funds) regulation on 15 February by the European Parliament is timely, as growth in inflows has been slowing down from institutional clients, according to Dirk Holz, senior portfolio manager and managing director at Commerz Real, which has roughly €34bn in assets under management.
The liquidity challenge may be one of the most relevant reasons why Eltif 1.0 funds have not come flying off the shelves, with only about €7bn in asset under management and a limited geographical adoption. Indeed, the current regulation requires investors to have their money locked-up for 5 years or halfway through the life of the Eltif, whichever is earlier.
Mathieu Scodellaro, principal at PWC Legal in Luxembourg, said: “the interesting development with Eltif 2.0 is that redemptions in open-end funds will be possible after a ‘minimal holding period’ which is yet to be defined by Esma,” the European Securities and Markets Authority.
Holz said he was looking for flexibility to better adapt to the needs of the investors. Once defined, the fund promoter must find the right balance between a sufficiently attractive potential return provided largely by the illiquid assets against an appropriate level of liquidity. Redemptions are still limited to the exposure in liquid investments (Ucits-eligible assets), but the cap is increased to 45% of the capital value of the assets, up from 30% under Eltif 1.0, to ease liquidity management. In addition, the minimum investment in long-term, illiquid assets is now down from 70% to 55% in the new regulation.
Liquidity matching mechanism
Moreover, an early exit should be possible only if the manager of the Eltif has put in place a liquidity matching mechanism, whereby the investors looking to exit the fund are matched with the investors entering the fund. Scodellaro and Holz are both assessing the provision as cumbersome, with the latter seeing it as more adequate for institutional investors in closed-end funds and not practicable for distribution channels involving retail investors.
Given the uncertainty about the “minimal holding period” or the complexity of the matching mechanism, some market participants, said Scodellaro, wonder whether a better course of action would be to structure the Eltif as a listed fund from the outset to ensure liquidity for retail investors. “The regulation enables promoters to have their fund listed on the Bourse de Luxembourg as closed-end or open-end funds”, he continued. At this point in time, Holz is not convinced given the potential discount and the regulatory burdens of listing a fund.
Scodellaro is optimistic about the potential success of the Eltifs targeting retail investors, but he expects institutional investors to favour the reserved alternative investment funds (Raif) regime over Eltifs given the higher flexibility in terms of diversification or eligible assets.
Commerz Real managed to raise more than €1bn in its existing Eltif invested in real estate and renewable assets, one of the largest Eltifs currently on the market. It was launched slightly more than two years ago and targeted mainly “wealth management clients” with a minimal investment of €10,000 and a minimum total wealth of €100,000.
Holz thinks that the removal of such a regulatorily required minimums could attract the “single digit thousand euros investors” and he could even foresee his parent company, Commerzbank, setting up a long-term saving plans starting as low as €1,000 with monthly subscriptions of €50. No doubt that this would supply a steady flow of liquidity.
Given the prominence of retail banks in the European landscape, the new regulation is expected to provide a welcome tailwind to the industry.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.