Silke Bernard, Global Head of Investment Funds, Linklaters, writes that it’s taken a long time – nearly nine years since the initial legislation came into effect – but European Long-Term Investment Funds appear finally to be on the point of a breakthrough.
Far reaching changes to the ELTIF rules that took effect in January this year have brought momentum in terms of new launches and innovation in investment strategies as fund promoters gain confidence that the new formula meets the needs of asset managers and of individual as well as institutional investors.
Slow beginnings
The regime was conceived as a means to encourage the deployment of retail savings in the European Union toward assets seen as possessing long-term economic, social, environmental and strategic value, including critical infrastructure, the transition to sustainable energy and decarbonisation of the economy, and unlisted small and medium-sized companies that needed new sources of capital to exploit their potential.
The first iteration of the legislation did win some converts, especially in Luxembourg, which quickly became established as the go-to domicile and service centre for ELTIFs targeting cross-border markets. But the sector’s growth was slow; over the seven years after the regime’s introduction in December 2015, just 81 funds were launched, attracting an estimated EUR7.4 billion in assets.
Managers expressed frustration about many aspects of the rules, often added in the name of investor protection, including diversification requirements that stipulated individual assets could not exceed 10% of a fund’s portfolio, and tight restrictions on the use of leverage. Meanwhile the bar was high for acceptance of non-professional investors, so much so that promoters opted to concentrate on institutional money or different types of fund.
The dawn of ELTIF 2.0
Hence the concerted effort launched by the European Commission in 2021 to revise the ELTIF Regulation in order to fulfil its original ambition of mobilising retail as well as professional investment. Following extensive consultation with asset managers, and with support from EU member states which perceived that the urgency of the envisaged investment priorities had in no way diminished, what has been dubbed ‘ELTIF 2.0’ is now in effect.
The revised regime addresses most issues raised by asset managers regarding ELTIF investment strategy rules, including greater flexibility on diversification, borrowing limits and eligible assets. It also removes many of the barriers to non-professional investors, including the previous minimum investment requirement of EUR10,000 for non-high net worth individuals.
Also important are the detailed regulatory technical standards adopted by the European Commission on July 19 this year. Following a debate with the European Securities and Markets Authority, the Commission has opted for a flexible approach to liquidity and redemption policy at ELTIFs open to individual investors, giving promoters freedom to adapt the fund’s structure and terms, including redemption frequency and notice period, to its investment strategy and goals and the needs of the investors it targets. Asset managers are satisfied that a philosophy of flexibility has won out over rigid one-size-fits-all requirements.
To this extent the regulatory regime promises to drive growth in the establishment of ELTIF funds and the assets they attract. One of the key aims behind the launch of regulated long-term funds was to channel retail capital into strategies aligned not just with the investment needs of the economy but with the long-term retirement provision requirements of an ageing population. The constraints of asset classes that do not offer short-term liquidity, including real estate, infrastructure and private equity and debt, fit better with longer investment horizons.
The conception of ELTIFs also tied into the economic environment of the 2010s, with low inflation and rock-bottom interest rates diminishing the appeal of savings accounts and fixed-income investment. While that changed with surging prices and the rapid rise in central bank rates in the wake of the Covid-19 pandemic, the signs point to lower levels in the coming years. The search for higher returns than those offered by short-term investment look set to be a permanent characteristic of the investment landscape in the years to come.
Optimism for the future
Are these factors bringing new impetus to ELTIFs? The signs are positive: as of the end of August, a total of 132 funds had been established across Europe, with Luxembourg accounting for almost two-thirds (84). And despite the ongoing process of finalising the detailed rules, 34 have been launched so far since January 10, 2024, when the ELTIF 2.0 legislation took effect.
Forecasts for the growth of the ELTIF range from €35 billion by the end of 2026, according to German rating and analytics firm Scope, to a more speculative European Parliament report suggesting that ELTIF assets might reach EUR100 billion by 2028. But there is broad confidence that the legislative and regulatory tools are now in place for Europe’s long-term fund regime at last to fulfil its potential.
