On 19 July 2024, the European Commission adopted its regulatory technical standards, or RTS, with respect to Regulation (EU) 2015/760 for the open-ended European long-term investment funds (“Eltifs”) and published these on its website. Marc Meyers and Sebastiaan Hooghiemstra at Loyens & Loeff highlight the key changes.
The RTS text is not final as it is still subject to a three month scrutiny period by the European Parliament or the Council of the EU. If no objections will be raised, the application date is expected to be towards the end of October 2024.
The RTS clarify various aspects with respect to Eltif 2.0., including, but not limited to the (i) minimum holding period, (ii) minimum notice period, (iii) liquidity management tools (“LMTs”), the (iv) redemption gates and (v) liquidity pocket provisions that are applicable to open-ended Eltifs.
We highlight in this contribution the key changes in this respect below.
No strict requirements for minimum holding periods
Unlike earlier iterations published, the latest RTS do not contain any strict requirements with respect to the duration of the minimum holding period of an Eltif.
To enable Eltif managers to complete the investments of its capital contributions, the RTS determine certain criteria on the basis of which managers are required to determine the length of the minimum holding period. A justification with respect to the appropriateness of the duration of the minimum period has to be given by the Eltif manager upon an explicit request by the competent authority of the Eltif.
Proportional approach
The RTS allow for a proportional approach with discretion for Eltif managers in terms of (a combination of) (i) minimum notice periods, (ii) redemption frequencies/gates and (iii) liquidity pockets.
In this respect, Eltif managers may, at their discretion:
- calibrate the (maximum) percentage of the redemption gate on the basis of the redemption frequency and the notice period of the Eltif, including the extension of the notice, if any, depending on which of one of the three options referred to in Annex I of the RTS is selected by the Eltif manager;
- or comply with a minimum percentage of a liquidity pocket and a maximum percentage of a redemption gate that is mandatorily linked to the redemption frequency set by the Eltif manager, as specified in Annex II of the RTS.
To determine the maximum size of redemption gate at a given redemption date under Annex I and II of the RTS, Eltif managers may apply a sum of Ucits eligible assets at the redemption date and the expected cash flow forecasted on a prudent basis over 12 months.
With respect to the latter, Eltif managers may only take into account those expected positive cash flows for which the Eltif manager can demonstrate that there is a high degree of certainty that they will materialise. Eltif managers shall not consider as expected positive cash flows the possibility that the Eltif can raise capital through new subscriptions.
If an Eltif manager of an open-ended Eltif opts to apply Annex II of the RTS and the minimum percentage of a liquidity pocket falls below the thresholds set out therein, Eltif managers are expected to take the necessary measures to reconstitute the minimum percentage of the liquid assets, while maintaining the ability of investors to redeem their units or shares, taking due account of the interests of the investors in the Eltif.
Where the notice period of the Eltif, including the extension of the notice period, if any, is less than three months, Eltif managers are required to inform the relevant competent authority thereof, including the reasons for such shorter notice period, and shall explain how that shorter notice period is consistent with the individual features of the Eltif. Eltif managers marketing an Eltif solely to professional investors may, upon request, be exempted from this requirement.
No defaults for LMTs & redemption gates
In relation to LMTs, the RTS, contrary to earlier iterations of the RTS, do not require anti-dilution LMTs to be adopted by “default” for which a derogation request for the use of any other LMT would need to be made to a competent authority.
Instead, the RTS mentions that Eltif managers “may” select and implement, at least, on anti-dilution LMT, including anti-dilution levies, swing pricing and redemption fees.
In addition, the RTS also mention that other LMTs “may” be selected, if appropriately justified to the competent authority. Again, Eltif managers may request their competent authority with respect to their “professional Eltifs” to be exempted from this requirement.
RTS Annex I matches most Luxembourg semi-liquids
Although the tables provided under both Annex I and II of the RTS are really complex, it is clear that the European Commission has made an effort to implement the comments made by the industry in the RTS.
In our view, Annex I of the RTS allows for redemption gate percentages which are high enough to cover the liquidity management set-ups of most types of semi-liquid funds that are being set-up in Luxembourg. This is less the case with respect to Annex II RTS. Both the required liquidity pocket percentages with respect to monthly and quarterly redemptions are slightly higher than Luxembourg market practice.
However, Eltif managers may choose to apply either Annex I or Annex II of the RTS.
Albeit complex, Eltif managers would, if adopted in unamended form, choose for either one of the options under Annex I, as redemption gates are easier to apply and have no impact on risk/return profile and, thus, the returns of an Eltif, whereas liquidity pockets do. In any case, an Eltif manager would choose a combination from both anyway and Luxembourg market practice seems, at the face of it, to fit into this table.
Although we expect that the tables under both Annex I and II of the RTS will be considered to be reasonably workable by industry practitioners, it will be interesting to see if, as is currently expected, indeed the adoption of the RTS will accelerate the uptake of Eltif 2.0 semi-liquid products. In any case, several competent authorities have already helpfully indicated to be willing to apply the definitive RTS ahead of the official application date.
Marc Meyers is co-managing partner of Loyens & Loeff Luxembourg and heads its investment management practice group. Sebastiaan Hooghiemstra is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg and senior fellow/guest lecturer of the International Center for Financial Law & Governance at the Erasmus University Rotterdam. The law firm is a knowledge partner of Investment Officer.