The European Long-Term Investment Fund (Eltif) stands out as a valuable and potentially crucial instrument for financing Europe’s energy transition, according to the chief executive of the Luxembourg Fund Industry Association (Alfi). He underscored the Eltif’s unique ability to channel new capital into projects with long-term sustainability objectives and said he would welcome fiscal stimuli for this specific type of Eltif.
Serge Weyland, who took on the role of CEO at Alfi in January, has suggested a pan-European tax incentive to promote Eltif fund investments in the energy transition. This presents a notable opportunity to formulate a proposal that could unite all European governments in support of a specific tax benefit for Eltif investments, aimed explicitly at advancing the European energy transition and sustainable finance objectives.
Weyland said he was encouraged by the recent push of Eurozone finance ministers to reinvigorate the EU’s capital markets union. “A lot of these ideas are being discussed, but sometimes we just fail in implementing that,” he said in an interview with Investment Officer. “We now have a product wrapper that could be used for this. We have to incentivise people also to use these investments,” he added, referring to Eltifs.
The enduring, long-term nature of Eltif funds distinguishes them from traditional investment vehicles, such as publicly traded Ucits funds. This characteristic potentially renders them more apt for directing financing towards long-term societal goals in areas such as the energy transition, climate change mitigation, and various ESG objectives.
Fresh capital
“We should not forget that in public markets, we are not talking about fresh capital. Here in private markets you are talking about capital increases, or financing - if you provide private debt for example. So you effectively contribute to really putting money to work at the target company, which is different than in the public markets. The immediate impact is there. It is measurable.”
Financing the European economy is a matter of great importance to Weyland, he stated. Currently, the European economy has approximately 14.000 billion euros - almost three times Luxembourg’s total investment fund assets - in cash and savings held in bank accounts, representing idle capital. This amount accounts for 41 percent of total household savings, in stark contrast to the 25 percent observed in US households.
This, Weyland said, should be seen as “a big failure, from the industry, from the regulators, from policymakers across Europe.”
“With that cash sitting around, we don’t finance the European economy,” he said. “What’s more, all these people are losing out. We are effectively watching a wealth gap that is widening and widening. Basically, we don’t do anything about this. I am very blunt here. Eltifs are definitely a move into the right direction.”
Cost of financing
Private market funds over the course of the last decade have generated stable and lucrative returns on the back of very low and negative interest rates. Now that rates have risen - with markets still digesting the ‘higher for longer’ scenario - some doubt if that private equity boom can persist. “There is a lot of debate of course, whether this will continue or not. I think a recent study shows that probably we will see those returns going back to lower levels, because of the cost of financing which has gone up,” Weyland said.
The completion of the legal framework for Eltif funds was highly anticipated in Luxembourg, host to 65 out of the 101 Eltifs registered in Europe. Alfi, among other national trade associations, advocated vigorously for increased flexibility, ultimately with success. Last week, the European Commission proposed final adjustments to the regulatory technical standards (RTS), notably ditching the European Securities and Markets Authority’s (Esma) initially proposed mandatory 12-month redemption notice period.
“I am very happy to see that the Commission has taken an approach to say, ‘Well, let’s make this product a success.’ Because the flipside would have been to see national regimes prevail. Of course the industry needs to act responsibly, both at a product manufacturer level and also distributor level to make sure that people know what they invest in. It’s a different asset class. It should not be seen as a short term investment. It’s definitely long term.”
Further reading on Investment Officer Luxembourg:
- Eltif 2.0: EC wants to abandon mandatory redemption period
- Eurozone seeks to resuscitate EU’s stunted capital markets project
- CSSF ready to conditionally approve Eltif 2.0 applications