Funds: Will the EU’s new “ELTIF” class of funds jumpstart growth or add to investor confusion?
Could Luxembourg provide a solution to Europe’s unsatisfied need for long term investment? Could the country bring to life the EU’s latest idea, the European Long-Term Investment Fund?
Europe’s savers are having a miserable time in a world of low interest rates. Governments cannot invest for future growth because there are political limits on state borrowing. The EU hopes it has found a solution by allowing individuals to put their savings into projects such as building transport links, social housing, funding promising small businesses and so on. This would be run through an ELTIF, and local fund specialists are hoping this will open another niche.
Current rules require funds aimed at the average investor (UCITS) to allow investments to be withdrawn at short notice. Financial institutions and the super rich can invest in large, long term, “illiquid” projects (through Alternative Investment Funds, AIFs), but there are difficulties packaging these to enable the retail saver to get involved. It is hoped that the ELTIF will provide a bridge. “As well as it being a problem for direct investment by the retail investor, some institutions such as pension funds can only invest in assets which are retail eligible,” noted Silke Bernard, counsel at the law firm Linklaters.
There is not yet consensus of whether this initiative will fly, with an industry figure saying “we wonder where this would fit into the product mix.” Investment funds need to reach critical mass to become profitable, so there are concerns that they could be a distraction from existing UCITS and AIFs, which perform similar functions.
Half raise their hand
Bernard is more bullish, saying a recent review of the proposals had removed some stumbling blocks, particularly regarding an adjustment of the “Solvency II” rules that apply to insurance companies. “When I speak at industry conferences I ask the audience whether they think the ELTIF will be a success and at least half put their hands up,” she noted. “Some of the big fund houses are looking at this closely.”
The European Commission has also reviewed the rules regarding the European Social Entrepreneurship Fund (EuSEF) and European Venture Capital Fund (EuVECA). Introduced earlier in the decade, these vehicles sought to make it easier to channel savings to these priority areas. Take up was extremely disappointing as the rules proved to be too complicated even for regulators to understand.