Regulation (EU) 2023/606 (the “ELTIF 2 Regulation”) amending Regulation (EU) 2015/760 of 29 April 2015 on European Long-Term Investment Funds (ELTIFs) was published in the Official Journal of the European Union on 20 March 2023. It will enter into force on 10 January 2024.
ELTIF 2.0 benefits
As a reminder, the ELTIFs, as introduced by European Regulation 2015/760, which came into force in December 2015, aimed to finance the real economy by channelling non-bank capital to long-term infrastructure projects and SMEs financing[1]. ELTIFs are European Alternative Investment Funds (AIFs) managed by a European Alternative Investment Fund Manager (AIFM) with long-term ELTIF label.
Since their introduction in 2015, the take-up of these new long-term funds has not been as expected: 57 ELTIF funds were launched with a total of EUR 2.4 billion raised, domiciled in four countries only[2]. In November 2021, the European Commission therefore proposed a new version of the ELTIF regulation, with broader marketing rules for retail investors and more flexible investment rules for managers, while adding investments that promote the Green Pact for Europe.
The amended regulation enables ELTIF-approved European AIFs to:
- Raise capital from professional clients but also from retail investors in the 27 Member States of the European Union by removing the threshold constraints of the first version of the regulation. Initially, the retail investor had to invest a minimum of EUR 10,000 in ELTIF without exceeding 10% of the overall portfolio of financial instruments in the ELTIF
- Invest in a wider range of eligible assets
Eligible assets under ELTIF 2.0
On the second point, eligible assets must now represent at least 55% of ELTIF’s net assets instead of 70%. Below are the new eligibility rules.
For eligible enterprises (equity or quasi-equity, debt instruments and loans)
- Financial fintechs are now eligible alongside financial companies
- The eligibility of unlisted companies is unchanged, but listed companies are now eligible when their market capitalisation is less than EUR 1.5 billion (500 million euros previously)
- Eligibility rules for thid-country companies are eased
- Green bonds are now eligible
- Simple, Transparent and Standardised (STS) securitisations are eligible under certain conditions
Concerning real assets
- Removal of the requirement of economic or social benefit
- Removal of the minimum investment threshold (previously, each asset had to have a minimum value of EUR 10 million)
- Virtually total eligibility of real assets excluding artwork, wine …
Regarding fund shares, UCITS and AIFs managed by European AIFMs are now eligible alongside ELTIF shares, European Venture Capital Fund shares (EuVECAs) and European Social Entrepreneurship Fund shares (EUSEFs).
New ELTIF investment rules
Investment policy and portfolio composition rules are also simplified. In addition to the reduction in the minimum share of assets eligible for investment mentioned above, ELTIF 2.0 brings the following changes:
Exposure to the same entity:
- For retail investors,
- Up to 20% of the assets can be invested in the same company, real asset or fund
- This cannot constitute more than 10% for the pool of non-eligible assets (i.e. assets eligible for UCITS in accordance with the assets referred to in Article 50(1) of UCITS Directive 2009/65/EC)
- There is no limit for professional investors
Concentration limit: the 25% threshold is raised to 30% for an underlying fund. This limit does not apply for professional investors or for master/feeder fund structures.
Indirect strategies
- An ELTIF can now be a feeder to another master ELTIF. Under the original ELTIF rules, a feeder fund could not itself be labelled as an ELTIF
- Fund-of-funds structure are feasible, with any type of European underlying fund, up to 100% of the assets, with a maximum of 20% exposure to the same fund as specified above. Until now, fund-of-funds schemes were only possible with an underlying ELTIF, EuVECA and EuSEF, within a limit of 20% of net assets and with a maximum of 10% exposure per fund
Lastly, concerning borrowing
- The 30% limit is raised to 50% of net assets for retail investors, and up to 100% for professional investors
- Conditions related to borrowing requirements are also more flexible. The allocation is no longer limited to eligible assets and, provided that the fund issues a reminder that the borrowing must be carried out in the same currency as the investments, exchange risk can be covered appropriately.
ELTIF 2.0 technical standards
By 10 January 2024, ESMA will publish technical standards for ELTIF 2.0. They are currently under consultation and should be published by the end of 2023. In particular, they should clarify:
- The Minimum Holding Period definition, which is the minimum holding period during which the asset manager will constitute the portfolio and investors cannot buy back their shares
- The liquidity management of these funds
- The conditions for capping redemptions from the non-eligible portfolio.
This revision of the ELTIF regulation should help to boost long-term fund vehicles in Europe.
In France, the Treasury is considering adapting French life insurance law to make ELTIF funds eligible for unit-linked life insurance support, whether invested in debt instruments or in shares.
[1] Small and Medium Enterprises
[2] Including 14 funds labelled in France, mostly in the form of specialised professional funds ((Fonds Professionnels Spécialisés or FPS)
