Will Eltifs be silver bullet or misfire?

The European Commission is offering Eltifs to drive economic growth but there are doubts among UK managers that the demand will be there for the plans in their present form

west brom

Retail investors may have greater access to overseas property funds or soon see more flexible multi-asset portfolios under the latest European Union proposals for a new type of investment product.

The European Commission has proposed an investment framework called European Long-Term Invest- ment Funds.

The impetus behind the structure is the need to promote economic growth and as such Eltifs are designed to invest in businesses that need money to be committed to them for long periods of time.

This includes infrastructure, transport and sustainable energy projects as well as unlisted companies and real estate.

In announcing the new structure earlier this summer, Michel Barnier, internal market and services commissioner at the EC, said: “We need to secure long-term financing for Europe’s real economy. Currently, financing is often scarce and, where it exists, too focused on short-term goals.” 

According to the EC, the new funds would be available to all types of investors but there will be restrictions on the types of long-term assets and firms in which the funds could invest. Any Eltif manager would also have to comply with all of the stringent require-ments of the Alternative Investment Fund Managers Directive with regards to investor protection.

There will be rules governing diversification to avoid over-concentration into a single asset as well as regulations concerning derivatives, allowing their investment but not for speculation purposes. These are similar to the rules governing Ucits and, like Ucits, these funds could be passported from one EU-member state into another.

In the UK, there are already a growing number of energy and infrastructure-related investment funds. However, these are done through listed vehicles, typically investment trusts or companies. In fact, this year alone, there has been a number of new launches in this area, many of which have been oversubscribed.

In late July, an IPO of the latest offering from InfraRed Capital was the subject of increased investor demand for such products. The London-listed, Guernsey-domiciled wind and solar fund, Renewables Infrastructure Group raised some£300m.

It followed the IPO of Bluefield Solar Income Fund Limited, which started trading on the London Stock Exchange on 12 July after raising £130m. That fund invests in large-scale agriculture and industrial solar assets.

According to WInterflood’s data on the growing closed-ended infrastructure sector, there are now over eight funds available to UK investors trading at an average premium to net asset value of more than 8 per cent. Funds in the sector have an average market cap of £696m.

The largest is HICL Infrastructure, which launched in early 2006 and was the first infrastructure investment company to be listed on the LSE. Currently, it has a market cap of more than £1.5bn. International Public Partnerships, a global infrastructure fund, also launched in 2006 and now has a market cap of just under £900m. 

One of the reasons why UK companies have opted for the listed company structure for investment in such assets has been their inherent illiquidity. This is why the new
Eltif would be unlikely to be as open-ended as a Ucits product.

According to the EC: “Firms need to be confident the money invested in them will be there for as long as they have told investors they will need it. This cannot really work if investors are allowed to take their money out at any time.

“Therefore, investors will not be able to withdraw money until the specified end date of their investment (this could be a date 10 years or more after the money is invested).

“This must be disclosed clearly up front. In exchange for their patience, investors would benefit from the regular income stream produced by the investment asset and possibly collect an illiquidity premium.”

But the fact that UK investors can already invest in such long-term asset products through non-Ucits retail schemes or closed-ended funds is why some doubt whether the Eltif will find much interest among UK managers. At least in the beginning.

Philip Warland, head of public policy at Fidelity, says the lack of widespread investing in areas like infrastructure is not because the right vehicle does not exist, as obviously there are such funds already available to retail investors. Instead, it is a demand problem. Warland says the EC needs to be seen to be doing something proactive, hence the Eltif proposals.

He says: “They are looking for things that will promote growth but I am not sure this is the silver bullet. I would not hold my breath that the demand for Eltifs will be there.”

Peter Grimmett, head of fund regulatory development, also notes the AIFMD already allows EU professional investors access to open-ended UK property funds, and similarly could offer UK professional investors access to continental EU property funds.

However, he adds: “Based on current proposals, Eltifs could potentially take this a step further and allow for the creation of closed-ended property funds that in theory could be accessed by EU retail investors. The Eltif proposals do not specify the underlying property must only be in the EU, so it may be possible to create global property Eltifs.

“You would expect areas, such as investment and borrowing powers, to be more flexible in Eltif than in a Nurs.”

Grimmett believes UK asset managers could use the new structure to create a new wave of product types, including a broader form of multi-asset funds.

“We are still working our way through the proposals with a view to seeing whether changes are required, for example, the need for partially open/closed-ended funds that allow for investor redemptions outside of a secondary market. It is vital that we get the initial legislation right in order for it to be successful for both investors and asset managers alike.”

Regardless, Grimmett, like Warland, has doubts over the initial appeal these new funds have for UK retail investors as they are currently proposed.

Grimmett says that with the heavy redemption restrictions they are likely to have, Eltifs may more likely be appropriate for small and medium-sized pension funds looking to access less liquid asset classes.