Regulation: Label of love?

Eltifs would enable long-term non-bank financing but will they get through? 

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The strategic agenda for the EU is moving from legislating to prevent another credit crisis towards economic growth. This includes the need to mobilise the right mix of private and public funding to facilitate long-term investment. 

Chiming with this theme are European proposals to introduce an optional fund label known as Eltif (European long-term investment fund). The label would be available to managers of EU-domiciled alternative investment funds to use on one or more of their funds and market them across the EU to a wider range of investors than under the standard AIF passport.

Eltifs would be a subset of EU AIFs that would meet certain investment requirements and restrictions. So the Eltif regime could be regarded as a form of product regulation within the AIF universe. The following restrictions are proposed:

  • Eltifs must be at least 70 per cent invested in certain types of asset
  • Derivatives use will be strictly limited to the hedging of currency and interest rates
  • Eltifs should be closed-ended and a fixed term with no early redemption rights but their units/shares may be listed and traded
  • At the end of the Eltif term, redemptions will be available in cash but may be offered in specie
  • Eltifs may distribute net income and capital gains but not original capital investment.

    Ucits or non-EU AIFs would not be able to use the Eltif label. The label is intended to encourage investments into unlisted companies and long-term projects in sectors such as real estate, infrastructure, sustainable energy and transport.

The European Commission believes Eltifs will contribute to non-banking finance available to companies that invest in the real EU economy. They are deemed suitable for pension funds and insurance companies as well as for smaller, retail investors which are able to invest money for the long term in return for a steady income or a lump sum at the end. 

In its discussions, the European Parliament broadly supported the EC’s proposals but the revised text issued in June by the European Council severely limits the ability of retail investors to access Eltifs. This begs the question whether the regime will be of any interest.

For professional investors, the AIFMD already provides an EU passport for all types of AIF without legislative restrictions. Will the label alone be so important that professional investors and fund managers will wish to be constrained by the specific rules?

Eltifs represent an excellent opportunity to establish, alongside the Ucits regime (for liquid securities), a complementary regime for funds invested in less liquid securities and real assets. We hear of clear interest from smaller institutions whose portfolios are not large enough to invest direct in such assets.

There is also interest among mass affluent and high-net-worth individual investors who may, for example, wish to allocate a small percentage of their retirement or other savings to Eltifs. 

If the Council position wins the day, we may have lost this excellent opportunity, to the detriment of investors and of securing greater non-bank financing of the real economy.

But more than that, there is growing evidence of interest in Eltifs from foreign institutions, especially in Asia. So the Eltif could quickly establish itself as a complementary export “brand” to Ucits.

The next stage in the legislative process is a trialogue in the autumn. Given that there will be new faces following the European Parliament elections, it will be interesting to see whether they have slightly different priorities and how determined they will be to push the proposals through to early adoption.

Julie Patterson, IMA director of regulatory affairs – investment funds & retail