Six months after the rollout of Eltif 2.0, the BlackRock private markets team believes this updated wrapper has the potential to become the vehicle of choice for private market investments, according to a paper the firm released on Thursday.
“We see Eltifs as the only wrapper capable of distributing private markets investment strategies to all investor types across Europe and look forward to this regulation making this asset class more widely accessible,” said Fabio Osta, Emea head of the alternatives specialists team at BlackRock, in a statement.
The updated 2.0 structure, launched in January, was designed to address and overcome some of the structural barriers that have previously hindered broader adoption of private markets. Key among these updates is the introduction of an evergreen, semi-liquid open-ended structure, aimed at easing concerns of investors wary of long lock-up periods.
‘No Alternatives to Eltifs’
BlackRock said it is important for investors and distributors to remain vigilant about liquidity management practices. The EU’s Eltif 2.0 framework aims to enhance the accessibility and operational efficiency of private market investment strategies across Europe. However, liquidity concerns remain a significant barrier to broader adoption, particularly among retail investors.
BlackRock, the world’s largest asset manager which already registered several new Luxembourg Eltifs that it will offer in 15 European markets, emphasises the crucial role of investor education in managing liquidity for the new generation Eltifs. ”Investor education needs to be at the core of every distribution strategy,“ BlackRock said in its 16-page paper titled “No Alternatives to Eltifs”.
This education is vital for ensuring that investors comprehend the liquidity mechanisms in place and can make informed decisions, according to BlackRock. Alongside this, robust liquidity management needs to be an integral part of every product design to provide a positive investor experience.
Traditionally illiquid markets
Alternative investments, including private equity, hedge funds, real estate, commodities, and collectibles, frequently encounter liquidity challenges. One significant issue is the long lock-up periods, where investors must commit their capital for several years without the ability to easily withdraw funds. Additionally, many alternative investments lack active secondary markets, making it difficult to sell holdings quickly or at a fair price.
Valuation uncertainty also poses a problem, as less transparent valuation methods for alternative investments compared to public securities can complicate fair market value assessments. High transaction costs and complex structures further limit liquidity, while fluctuating market demand can significantly impact liquidity, especially during periods of market stress or economic downturns.
Concerns over a lack of liquidity in alternative markets have been voiced by financial regulators across the globe. In Luxembourg, a major global alternative investments hub, officials at financial supervisor CSSF officials have repeatedly emphasised that liquidity risk management remains a critical discussion point.
‘Managing the liquidity bias’
Historically, perceived liquidity risks have been a major barrier to entry for private markets. Closed-ended strategies often demand long lock-up periods, generally up to eight or ten years, deterring risk-averse investors who prefer the flexibility of mutual funds, ETFs, and savings accounts. This liquidity bias has resulted in under-allocation to private markets, said BlackRock.
BlackRock addresses this by offering open-ended evergreen strategies that provide the flexibility for investors to enter and exit their positions, typically on a quarterly basis, depending on their risk appetite and investment horizon. This flexibility is crucial for risk-averse investors who may hold these strategies for many years but are concerned about the perceived liquidity risks associated with traditional private markets.
“The popularity of open-ended strategies is a relatively recent phenomenon in the private markets’ world, but they have been long-established for mutual funds,” commented Osta. “This means that open-ended Eltif will be able to draw on some of the key operational features that have made mutual funds so scalable.”
BlackRock underscores the importance of operational innovations and robust liquidity management in the success of Eltifs. The regular liquidity offered by evergreen funds enables granular and tactical asset allocation across private market exposures, BlackRock said. Discretionary portfolio managers, or DPMs, can adjust their exposure over time, generating alpha through strategic asset allocation.