Norman Finster, Consulting Partner, Alternative Investments Leader, EY Luxembourg Crédit photo: EY Luxembourg

Norman Finster, Consulting Partner, Alternative Investments Leader, EY Luxembourg Crédit photo: EY Luxembourg

While the alternative investments industry impatiently awaits the first vehicles to be launched under ELTIF 2.0 and expects an avalanche of retail investor money flowing into them, an overlooked but crucial element for success lies in the operational readiness amongst asset managers, servicers and distributors.

The updated regulation on the European Long-Term Investment Fund, commonly referred to as ELTIF 2.0, will enter into force at the end of this year. Through this revision, the EU lawmakers have remedied the fundamental weaknesses of the original ELTIF regulation and thus created an alternative investment fund product that can truly propel growth of alternative assets in the portfolios of retail investors.

The challenge for alternative asset managers: managing liquidity

While alternative asset managers in some asset classes, e.g., real estate, have already built up some experience with the management of semi-liquid fund structures, ELTIF 2.0 products will add further complexities as they will allow investments into real assets and UCITS eligible liquid assets at the same time. Alternative asset managers will thus have to adjust their investment processes to be able to invest into liquid assets, and provide for investor return and liquidity to satisfy redemptions from retail investors. They will also be required to perform liquidity modeling for the fund to plan for (re-)investment and perform liquidity stress testing programs.

The challenge for fund accountants: aggregating real assets and liquid assets

Most fund accounting systems have been designed in a way to facilitate the accounting for liquid (UCITS eligible assets) or illiquid assets (private equity, private debt, real estate, infrastructure). Fund accountants will therefore be required to find effective methods to aggregate liquid and illiquid assets when performing the calculation of the net asset value (NAV).

The challenge for registrar agents: providing connectivity to retail distribution networks

Most existing alternative investment funds have a limited number of institutional investors, are closed-ended, and operate on a commitment basis. For retail ELTIFs, the IT systems of the registrar agent will have to provide for connectivity to retail distribution networks, including distribution platforms connecting the local bank of the end investor with the ELTIF’s shareholder register through SWIFT messaging and nominee account structures. Only technical infrastructure that is set up in this way will be able to cope with the high number of retail investors and their subscriptions and redemptions. The execution of liquidity management tools, such as lock-up periods or redemption gates, will also add further complexity to the registrar agent’s operations.

The challenge for fund distributors: marketing the ELTIF product with retail investors

Until today hardly any alternative investment products made it onto the shelves of retail banks or independent financial advisors. Success of ELTIF 2.0 will be dependent on the effectiveness of placing these products with the end investors and keeping the investor’s money in them through the investment cycle. Due to the described lack of experience with alternative investment products, significant investment into the education of the distribution network will be required.

 The time for getting prepared is now

The success of ELTIF 2.0 will be highly dependent on how and when the different players within the alternative investment value chain manage to adapt their operating models for this type of product. As such transformations can be lengthy, players who perform a timely impact assessment of ELTIF 2.0 on their organization will have a competitive advantage. As could also be seen from the different challenges described, retail ELTIFs embed many characteristics of UCITS products. Those players with experience in UCITS and AIFs may thus be put in a strategically better position.

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