The countdown to ELTIF II has begun

In a nutshell:

• ELTIF II update leads to a more friendly regime for management and distribution to retail investors.
• ELTIF II will offer a passport for retail investors.
• ELTIF II will go live in 9 months (January 2024) offering time to build business cases.

Context

The European Long-Term Investment Fund (ELTIF) story is now an old one. After ELTIF regulation launched back in 2014 with the realization that it was not a total success, EU authorities returned to the drawing tables.

ELTIF version II was finally agreed and published on the 20 March 2023, after consultation, a draft by the European Commission at the end of 2021, and a year of interinstitutional discussions.

One essential feature of the ELTIF remains. The product regime builds on AIFMD and AIF requirements; using the ELTIF label entails a guarantee or certification of management requirements.
 

ELTIF II: What changes?

To address the changes brought in the ELTIF II, you must go back to the first version. Three underlying forces drove the 2014 regulation:

• A necessity to allow the EU to better balance bank versus market-based financing for its big projects;
• A dubious view of professional stakeholders, amid the new-at-the-time AIFMD regulation;
• And a suspicious perspective from retail investors and supervisors on the product adequacy: essentially an AIF to be managed for long period with immobilized capital.

Between now and then, another crisis struck, and the necessity to finance long-term projects has not abated. Additionally, the necessity to transform into more sustainable economies became material with EU Commission net-neutrality by 2050 goals. Armed with this and after hearing from stakeholders, the European Commission decided to address these themes with an ELTIF review of ELTIF.

ELTIF version I fell short in two main areas:

1. Compared to a plain vanilla AIFs, there were too many investment constraints (assets, liquidity, diversifications, etc.)
2. ELTIF I’s double-layered approach made it impractical for retail distribution.

In the meantime, two regulations entered into force on the retail client distribution side – the MIFID II and IDD (insurance distribution Directive). Both require the distributor to evaluate their clients and the products they propose to them, before and at the moment of advice or sale. These regulations allow for a complex ELTIF I to approach limits (€10,000 investment and 10% diversification) and to erase double analysis in favor of only MIFID (or IDD) rules.

Hence, provided they meet the suitability test, ELTIF II can be marketed to retail investors. Obviously, if the criteria will allow offering to retail, you still must consider if the funds can be financed in long-term infrastructures versus the speculative product some might be expecting. Depending on future ESMA positioning, open-ended ELTIFs might even be a possibility.

ELTIF I was also tricky for asset managers themselves, as it required complex diversification criteria, combined with asset eligibility and scope limitation. ELTIF version II substantially amends these requirements, but preserves some to create diversification of investments and open ELTIFs to master-feeder structures, funds of funds, or more open criteria on the eligibility of real estate, securitized instruments, etc.
 

Why it matters for you

At a time when Europe is talking about sustainable development, searching for investment money to support the green transition, etc., ELTIF review is more than welcome. Most exciting is that ELTIFs are, by design, an AIF with the possibility to passport to retail investors across the EU.

For Alternative Investment Fund Managers or wealth managers vested in long-term projects, ELTIFs are likely to merit a place in your distribution strategy to ease your transition towards retailization of AIF products.

Accordingly, the ELTIF will become a feature in the Luxembourg toolbox of funds alongside AIFs, Part IIs, SIFs, SICARs or RAIFs.
 

Next steps

With the publication in the Official Journal of the EU, ELTIF version II will go live on 9 January 2024; at that time, existing ELTIFs will automatically convert to the new framework, even if this entails a review of the issuance prospectus to materialize strategy updates.
 

How Deloitte can help you?

Deloitte’s RegWatch will help you stay tuned to regulatory updates and anticipate regulatory changes impacting your business and organization.

Deloitte’s Advisory and Consulting services can help you:

• Refine your strategy;
• Deploy and accompany the creation of ELTIF licences and strategy;
• Identify the most optimal set-up, including managing licencing fees or tax;
• Design the most adequate distribution structure for retail or more professional investors.