ELTIF 2.0 | Amending Regulation published in Official Journal of the EU
06/04/23
On 20 March 2023, approximately 16 months after the Commission presented its original proposal to amend the European Long-Term Investment Funds (ELTIF) Regulation (hereinafter ‘the Regulation’), the amending Regulation has finally been published in the Official Journal of the European Union. This is the result of months of negotiations between the Council of the European Union and the European Parliament. For more context, see our previous Newsflash on the prior interinstitutional agreement and our ELTIF dedicated webpage for more information on the ELTIF investment vehicle.
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Background
The modifications brought by the amending Regulation are part of the EU Capital Markets Union initiative. Indeed, since ELTIFs are designed to channel long-term investments, they are well placed to help finance the green and digital transitions.
While the Regulation was adopted almost eight years ago, the available market data indicate that the development of the ELTIF segment has not scaled up as expected, due notably to significant supply‑side and demand-side constraints. For this reason, the Commission proposed to amend the Regulation to make it more appealing for both investors and fund managers. In this context, amendments were brought regarding, notably, the scope of eligible assets and investments, the portfolio composition and diversification requirements, the conditions for borrowing and lending of cash and other fund rules, including sustainability aspects.
ELTIFs are the only type of fund dedicated to long-term investments which can be distributed on a cross-border basis to both professional and retail investors. In this respect, one of the goals of the amending Regulation was to make it simpler for retail investors to invest in ELTIFs while ensuring them strong protection.
Key take-aways
Eligible assets
The minimum value threshold for individual real assets (currently EUR 10m) has been removed – which will contribute to the diversification of investment portfolios and boost more effective investments in real assets by ELTIFs.
The market capitalisation threshold for the investment in listed portfolio undertakings has been set at EUR 1.5bn (instead of EUR 500m). This will provide ELTIFs with a better liquidity profile.
Taking into account, among other things, the development of FinTechs and their important role in promoting digital innovation, it was decided that ELTIFs would be allowed to invest in financial undertakings other than financial holding companies or mixed-activity holding companies, that are regulated entities authorised or registered more recently than five years before the date of the initial investment.
It was also decided that the scope of eligible investment assets would be extended and that ELTIFs should be encouraged to invest in securitised assets (simple, transparent and standardised securitisations).
Portfolio composition
The minimum eligible assets threshold has been set at 55% of the whole portfolio composition (instead of 70%) and the individual maximum diversification limit on investments has been set at 20%.
Fund of funds and master feeder structures
Fund-of-fund strategies are a common and very effective way to obtain rapid exposure to illiquid assets, in particular for real estate and in the context of fully paid-in capital structures. It was therefore considered necessary to give ELTIFs the possibility to invest in other funds, to enable them to ensure a faster deployment of capital.
In this context, the eligibility of fund-of-fund strategies for managers of ELTIFs has been extended beyond investments in EuVECAs or EuSEFs. Indeed, the categories of collective investment undertakings in which ELTIFs can invest has been broadened to include UCITS and EU AIFs managed by EU AIFMs.
However, in order to ensure effective investor protection, it has been specified that, where an ELTIF invests in other ELTIFs, in EuVECAs, in EuSEFs, in UCITS or EU AIFs managed by EU AIFMs, those funds must also invest in eligible investments and must not themselves have invested more than 10% of their capital in any other collective investment undertaking.
Retail vs professional investors
Professional and retail investors have different time horizons, risk tolerances and investment needs as well as different capabilities to analyse investment opportunities. Due to the current, almost identical rules (on the use of leverage, on the diversification of assets and composition of portfolios, on concentration limits and on limits on the eligible assets and investments) and the resulting high administrative burden and associated costs, asset managers have to date been reluctant to offer tailored products to professional investors.
Therefore, the amending Regulation provides for specific rules for ELTIFs that are marketed solely to professional investors, in particular with regard to the diversification and composition of the portfolio concerned, the concentration limits and the borrowing of cash.
With respect to retail investors, the Regulation requires that potential retail investors whose financial instrument portfolio does not exceed EUR 500,000 make an initial minimum investment of EUR 10,000 in one or more ELTIFs and that such investors do not invest an aggregate amount exceeding 10% of their financial instrument portfolio in ELTIFs. In order to facilitate and boost investments in ELTIFs by retail investors, these two thresholds have been removed by the amending Regulation.
ESG
The original request by the European Parliament to create an optional designation of ‘ELTIFs marketed as environmentally sustainable’ or ‘Green ELTIF’ has not been retained. However, this topic has been included in the review clause, meaning that by 2026, the Commission will look into the possibility, viability and desirability of such a designation of ELTIFs.
Please note that ELTIFs are nonetheless subject to the obligations as set by the SFDR.
Moreover, it has been clarified that ELTIFs are able to invest in green bonds. However, such green bonds will have to comply with the eligibility requirements of the Regulation and be issued pursuant to an EU Regulation.
Grandfathering clause
ELTIFs authorised in accordance with and complying with the Regulation applicable before 10 January 2024 will be deemed to comply with the amended Regulation until 11 January 2029.
ELTIFs authorised in accordance with and complying with the provisions of the Regulation applicable before 10 January 2024, which do not raise additional capital, will be deemed to comply with the amended Regulation.
However, ELTIFs authorised before 10 January 2024 may choose to be subject to the amended Regulation, provided that the competent authority of the ELTIF has been notified of this decision.
Next steps
The amended Regulation will enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. However, it will only apply as of 10 January 2024.
Maya Van Belleghem
