1. Distribution and marketing
ELTIF managers have the possibility to distribute products directly to investors or rely on distributors and intermediaries for the end-investor access. There are few important aspects to consider in this space, notably around the following: (i) increase in volume of investors, (ii) investor onboarding process, (iii) performance of suitability tests, (iv) distributor onboarding and ongoing monitoring, (v) management of orders (subscriptions, redemptions and/or transfers) and (vi) reporting requirements.
The new way forward for open-ended ELTIFs will require selecting the right distribution partner and channels; this could be a combination of private banks, wealth managers, retail banks and distribution platforms. Each distribution partner and/or channel brings its own set of advantages and unique operational requirements, and these should be appropriately addressed by the manager’s operating model.
2. Selection of the best investor profile
The regulatory definition of “retail” investors includes a wide range of investors, from mass retail clients to potentially high-net worth individuals (HNWIs). As such, it is important to define the key fund features such as lock-up (hard and soft) provisions, early redemption penalties, minimum ticket sizes, share classes, etc. Distributors and intermediaries must also clearly warn the end investors of all potential risks when investing in such products, as they are not comparable to Undertakings in Collective Investment in Transferrable Securities (UCITS) or other mutual funds.
3. Liquidity management
Liquidity management is at the heart of any viable open-ended fund, as it serves to gate any liquidity mismatch of a liquid fund owning illiquid assets. The tools to be implemented should ensure the investor's option to redeem while minimizing the impact such provision would have upon the fund’s performance.
More specifically, ELTIF 2.0’s Regulatory Technical Standards (RTS) have defined the different liquid assets that funds need to have depending on redemption frequency and notice period. Maintaining this appropriate level of liquidity is key to meeting potential face cash outflow needs (i.e., redemption requests or additional investments to pursue), while also managing excess liquidity without significantly impacting the fund’s performance, especially in inflationary markets.
As fund managers seek to optimize these liquidity management tools over time, they should continuously back test their models by comparing the forecasted figures along with the actual metrics.
4. Optimal asset mix
ELTIF fund managers need to build a rather sizable and diversified portfolio with quality assets. Building such a portfolio from scratch might prove challenging but is often achieved through various approaches. For example, it’s not uncommon for fund managers to bring an existing portfolio of assets to build a “minimum viable” fund, which can deliver both on performance and keep the total expense ratio (TER) at acceptable levels. Managers are also able to more easily deploy capital by warehousing assets through a separate vehicle at their disposal.
In addition to that, fund managers will need to build and complement their asset management capabilities by sharpening their skills in liquid assets and trading.
5. Relationship with the service provider
Working with the right third-party service providers (fund administrators, transfer agents, depositaries, regulatory reporting providers, tax services) will also be critical to ELTFs. In addition to supporting compliance with applicable regulatory requirements, the ideal third-party service provider will help integrate optimized processes imperative for success of these products.
For example, long-term fund managers must contend with a high volume and frequency of capital raising, investing, servicing fees to distributors, performance fee/carried interest calculations, and distributions. All of this adds to the already complex fund activities which include accounting, registrar, and depositary services. To avoid drag on back-office operations like resources, risk, and quality, fund managers should select a service provider that can deploy an operating model that feels both like a natural extension of their own operations and meets the required terms set in the prospectus vis-à-vis both institutional and retail investor populations.
6. Valuation
The inherent mismatch in the liquidity profile between fund level and asset level can lead to valuation challenges for managers as they design appropriate valuation models and governance processes within the Alternative Investment Fund Manager (AIFM). It is important to note that additional regulatory requirements under the AIFM Directive (AIFMD) and Commission de Surveillance du Secteur Financier (CSSF) Circular 24/856 also apply to ELTIF managers when it comes to designing the right valuation processes and governance framework. In the context of increased regulatory and investor scrutiny on valuations, ELTIF fund managers must pay clear attention to valuation frameworks; this includes assessing the availability, reliability and timeliness of the underlying data and existing governance.
7. Data management
Data is invaluable, and fund managers will need to establish a data management strategy with strong data governance that clarifies specific owners, documentation, and required processes. This, in combination with building common reporting frameworks across teams, will ensure a smooth and centralized delivery of data. This is especially critical when trying to coordinate with diverse asset portfolios and multiple third parties. It is also integral to producing investor disclosures, regulatory reporting, management information, and portfolio management reports.
