A comprehensive review by the European Commission has the potential to put the European long-term investment funds (Eltif) regime back on track and set it up for the kind of success Ucits funds have experienced. Eltifs can become competitive with AIFs by removing many factors that made Eltif take-up much lower than had initially been hoped. The investment community has been broadly supportive of the reset.
“The proposed amendments are clearly positive; the breadth and scope of them illustrate the shortcomings with the current system,” said Mark Shaw, a partner at Wildgen.
“Assuming these changes are made, there is no reason why Eltifs can’t go on to be successful in the same way that Ucits have, but this won’t happen overnight.” Shaw pointed out that Ucits have had a 30-year head start, or even a 40-year one if the existing Eltif regulation is considered a false start.
The Commission published its proposal to amend the Eltif regulation last November, as part of its Capital Markets Union 2.0 Action plan. Its consultation is set to close at the end of this month, after which the Commission will adjust its proposal and submit it to the European Parliament and European Council for approval.
Limited takeup
To date, only 57 alternative investment funds, or AIFs, with 2.4 billion euro in assets under management, have been authorised under existing Eltif provisions in four jurisdictions, namely Italy, France, Spain and Luxembourg.
The current system has its defenders. Laurent Capolaghi, a partner and private equity leader at EY Luxembourg, wrote in January: “The current Eltif regime already comes with some distinctive advantages which have not been yet fully leveraged by sponsors.”
Wildgen’s Shaw took a contrasting view. “The simple fact is that Eltifs have not been successful,” he said. “We have had plenty of promoters who have come to us with the intention of establishing an Eltif under the current regime, but once we go through the investment and borrowing rules, they typically just opt for the freedom offered by an AIF.”
Too great a trade-off
Shaw continued: “In terms of the investment mandate, the compromises that promoters are currently required to make are too great a trade-off for accessing a pool of potential investors that is largely unknown or unfamiliar with the asset class.”
Under the proposal, the Eltif’s minimum investment amounts - the 10,000 euro minimum amount invested and 10 percent portfolio aggregate limit for Eltifs - would be removed. The reform brings in an alignment to the suitability test defined by Article 25 of MiFID II.
The scope of the eligible asset universe would be enlarged, making possible more diverse investment opportunities, including fund-of-funds investment strategies, real assets, financial assets, an increased minimum capitalisation (up to 1 billion euro) for qualified portfolio undertakings to be investable, and lowering the restrictions on real asset holdings.
Investors would be able to withdraw from the investment agreement, redeem or transfer their units/shares or make complaints about the Eltif manager’s actions should they have concerns.
There has been much praise of the Commission’s proposal.
Strong support
Efama, the organisation representing the interests of European fund and asset managers, said at the end of February that it “strongly supports” the proposed amendments.
The association saluted the proposal for successfully removing “the unnecessary barriers that have limited retail investors’ access to long-term investment opportunities while preserving a sound investor protection framework.” Despite this, Efama included a list of further revisions it would like to see.
“The additional flexibility provided for in the overhaul proposal has the potential to alleviate most of the pain points for sponsors and should enhance the attractiveness of the vehicle in a context of Covid-19 recovery,” wrote EY’s Capolaghi.
More successful regime
“While the proposal is not tackling all the issues, it’s an important step in making Eltif a more successful regime, accompanying the increased market pick up of that framework over the last two years,” wrote PwC Legal Luxembourg principal Mathieu Scodellaro.
Scodellaro pointed out, however, that while the proposed amendments deal with some of the criticisms of the current regime, there are still operational issues that can affect the launch of an Eltif, such as the need to have an appropriate distribution network when marketing the investment to retail investors, that are not due to the regulation.
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