Revisiting the ELTIF: 2023 Regulatory Updates to European Long-Term Investment Funds

When it was first introduced in 2015, the European Long-Term Investment Fund (“ELTIF”) was a turning point for alternative investment fund (“AIF”) management. Recent enhancements to the platform adopted by the European Parliament mean that it might be a good time for fund managers to take a new look at the ELTIF and how it can work as a capital-raising tool for investors—including those looking to back the European Green Deal.

What is an ELTIF and what in the platform has changed?

The ELTIF, as its acronym suggests, encourages investment with a long-term view by promoting an asset allocation strategy with a similar horizon. The European Economic Area (“EEA”) ELTIF Regulation outlines which assets are eligible and the parameters for portfolio diversification.

The original ELTIF regime aimed to fulfil a dual mandate of increasing retail investor access to a more diverse, less liquid, asset class as well increasing capital allocation to real assets and infrastructure.  Uptake was slow however, due to a number of shortcoming and overly restrictive portfolio constraints.

All AIFs looking to participate in an ELTIF must be approved under the ELTIF Regulation, directed by an EU-authorised alternative fund manager (“AIFM”) and must be a set-duration fund. Lastly, only AIFs that are EU-authorised under the ELTIF Regulation may use the acronym or the phrase “European long-term investment fund” or “ELTIF”.

Fund managers may include in their ELTIF “wrapper” infrastructure, private equity, real estate, and other real asset classes. The ELTIF also can allow for loans to be acquired on a secondary basis, as well as invest in debt securities, equities and eligible collective investments. Moreover, it provides an entry by which retail investors can access and allocate to products typically only available to institutional investors. The ability for a wide array of investor types to access ELTIFs is of keen interest to stakeholders who would like to see greater uptake of the structure.  A recent review by the European Commission has led to a number of important and much anticipated enhancements to the ELTIF regime in order to increase its use and appeal.
The updates to the ELTIF regulation, collectively known as ELTIF 2.0, are intended to facilitate ELTIF adoption, in turn, bolstering adoption of this model. Some of the key changes include:

• A larger selection of permissible investments, such as a more simple definition of “real assets”;
• Lower minimum percentage of investment in illiquid assets( from 70 to 55%);The opportunity to invest in non-EU qualifying portfolio undertakings (“QPUs”); and the possibility to invest in simple, transparent and standardised securitisations (“STS”), with underlying assets comprising mortgage-backed securities, trade receivables, and corporate, commercial, and residential loans;
• More flexible structuring options for easier capital deployment, including master-feeders, indirect investments, co-investments and fund-of-fund strategies; and
• Easier entry for retail investors, including lifting the minimum investment requirement of €10,000, the 10% investment cap on retail portfolios not worth in excess of €500,000.

Why should investors consider the ELTIF structure?

ELTIFs offer a cross-border mechanism to provide nonbank financing for companies that are investing in the EU economy, paving the way to portfolio diversification. While offering another pathway to non-equity asset classes such as private equity to a broader set of investors, including retail investors, the platform offers risk spreading and other protections.

What is the reason for the updates to the ELTIF regulation?

The alternative investment industry heralded the ELTIF when it first launched eight years ago, though uptake of the platform has not matched initial expectations. EEA member legislatures then examined and proposed new regulations under the regime to promote adoption of the fund wrapper. The respective governments came to an agreement on the ELTIF regulatory updates on 27 November 2022.

The European Parliament ratified the text in February, it entered into force in April and will go into effect 10 January 2024. The changes will allow AIFMs greater facility in gaining allocations, including those with an environmental, social, global (“ESG”) focus—particularly European Green Bonds—as well as furthering the European Green Deal, the EU’s bid to become the first carbon-neutral continent.

How a third-party AIFM and administrator can help navigate ELTIFs and ESG

Having the right AIFM and administrator to assist with the launch and servicing of your new ELTIF structure is crucially important. All European AIFs (including ELTIFs) can avail of the services of a third-party AIFM to assist with their ongoing obligations under their regulations.   Any manager considering launching an ELTIF should choose both an AIFM and administrator with deep expertise and outstanding service record in servicing private assets. This should include skilled teams specialising in not only the relevant asset classes but also fund structures, supported by industry leading technology.

Maples Fund Services currently provides administration services to a large number of investment funds investing in real assets, growth capital, infrastructure and intellectual property assets, and across all relevant fund structures. Their expert teams bring deep expertise, backed by award winning technology and reporting infrastructure delivering outstanding service across the full fund life cycle.

MPMF Fund Management (Ireland) Limited (“MPMF”), the Maples Group’s Central Bank of Ireland authorised AIFM, is fully resourced, staffed and operational to plan, execute, control, and monitor key management functions as required by the relevant regulations.  The team has deep experience across finance, operations, risk management and regulatory compliance. MPMF also provides services for companies looking to meet and broaden their ESG offerings and compliance with ESG regulations such as the Sustainable Finance Disclosure Regulation (“SFDR”) for Article 6, Article 8, and Article 9 funds. This includes the Maples Group ESG Platform ICAV, dedicated to hosting sustainable funds looking for distribution solutions in the EU.  The platform is an Irish Collective Asset Management Vehicle (“ICAV”) an umbrella fund structured especially for ESG funds, and allows for SFDR compliance and European distribution, as well as exclusive access to a first-of-its-kind solution for independent certification of a fund and manager’s ESG strategies.

What to expect with the ELTIF going forward

The much-anticipated new ELTIF regime goes live early in 2024 and managers should begin assessing if they can avail of it to provide retail investors access to a broader set of eligible assets including real assets and infrastructure.   For managers looking to broaden offerings to ESG and beyond, ELTIFs can pose a new opportunity for unique market positioning.