The ambition of the financial sector to further democratise private markets in the Netherlands is not yet convincingly reflected in practice. The Dutch Authority for the Financial Markets (AFM) has reported a lack of enthusiasm for the European Long-Term Investment Fund (Eltif) regime. The so-called “top-up” option, which allows Alternative Investment Fund Managers (AIFMs) to open their funds to retail investors, is sparingly used for private equity and private debt funds.
The fund industry often discusses Eltif 2.0, the revised European framework for investment funds set to take effect next year. This new instrument offers more flexibility in investment structures and fewer stringent regulations. The aim is to democratize investment in private markets, which has historically been primarily accessible to institutional investors due to the illiquidity of these assets. Luxembourg is particularly enthusiastic about this development, according to experts.
Indeed, preparations for product launches under Eltif 2.0 are underway. DWS recently introduced its first Eltif under the old rules and plans to utilize the vehicle under the 2.0 version. Natixis is also working on a product compliant with the new regulations.
European Parliament member Michiel Hoogeveen previously estimated that up to €100 billion could flow into the reformed Eltif, a significant increase compared to the current figure. Earlier data reveals that less than €10 billion is invested in the European regime launched in 2015. A spokesperson for the Authority for the Financial Markets commented, “There is currently little interest in the Eltif regime.”
Unresolved challenges
Wim Nagler, head of the institutional division at Schroders, expressed concern that even after the reform, the assets under management in Eltif funds might fall significantly short of the €100 billion target. This is because there are not enough euros available for investment in these types of funds, and more importantly, Eltifs are not permitted to abandon their closed-end structure, which doesn’t provide the liquidity often sought by retail investors.
Martijn Langenberg, sales director at Natixis Investment Managers, also states that Eltif 2.0 “solves some of the problems but not all.” He points out that the requirement for investors to remain locked in for a specified period, determined by the asset manager, still limits flexibility and freedom. For private equity, this lock-up period is typically three years, while for private debt, it’s one year.
He clarifies: “The 2.0 version is certainly an improvement over the first variant, offering expanded investment opportunities, but the question is whether the desired flows will materialize. For version 1.0, interest was minimal; in version 2.0, it will likely increase. It does make private markets somewhat more accessible, ultimately contributing to the democratization of private assets. It’s a step in the right direction.”
Two-pronged approach
Natixis IM has adopted a two-pronged approach. In addition to Eltif 2.0, the asset manager is also focusing on a “retail top-up” for an existing Reserved Alternative Investment Fund (Raif) that invests in a mix of public and private debt. This option has been available in the Netherlands since mid-2013 and allows Alternative Investment Fund Managers Directive (AIFMD) licensed entities to offer their funds to non-professional investors under certain conditions.
The participation rights can be acquired for less than €100,000 per participant. In return, the provider has more stringent reporting obligations, increased transparency requirements, and additional operational requirements in line with standard Ucits and Sicav funds.
Of the more than 100 AIFMD license holders, approximately 50 managers offer their funds to retail investors, according to an AFM spokesperson. He adds that the top-up option is broadly used and not limited to a specific type of alternative fund. The regulator does not comment on ongoing license applications.
Furthermore, there is a distinction between providers that offer their funds to both professional and retail clients and those that target one of the two groups exclusively. The AFM’s license register reveals that Mint Tower Arbitrage Fund and ASN Biodiversity Fund, for example, cater to both professionals and retail clients, while Triodos Groenfonds and funds managed by Anthos Private Wealth Management specifically target retail investors.
Significant effort
Natixis IM is specifically utilizing the top-up option for a fund that invests in private debt and has no immediate plans to use it for another fund. The fund in question is the MV Dual Credit fund, with MV Credit responsible for 60% of the allocation to private debt, and Loomis Sayles handling the remaining 40% in regular bonds. MV Credit focuses on European mid-market loans from non-cyclical companies with strong cash flows.
The fund’s origins trace back to the UK five years ago, created in response to the transition from Defined Benefit (DB) to Defined Contribution (DC) pension schemes. Martijn Langenberg explains, “Traditional DB funds typically allocate generously to private markets, but in DC structures, this is challenging due to liquidity requirements. For DC funds, we wanted to facilitate access to private markets through a more liquid private markets fund.”
With the new pension law in the Netherlands, Natixis aimed to replicate this for the Dutch market. However, since RAIF funds typically require a minimum investment of €100,000, it wasn’t practical with the existing fund. Langenberg says, “We didn’t see much traction. After discussions with lawyers and the AFM, the retail top-up was proposed. Now, we have a fund with no entry barrier.”
Langenberg acknowledges that this approach entails “quite a bit of work,” referring to the additional reporting requirements imposed on funds targeting retail investors. Additionally, unlike many other private market funds, this fund offers daily Net Asset Value (NAV) and daily liquidity.
Monthly liquidity
Is it appropriate to allow daily in-and-out movements for a private fund? Langenberg comments, “In principle, it’s not ideal; long-term investing is preferable. But it can be done. We have four sources of liquidity in the fund, including the 40% investments in liquid markets and the coupon payments from the fully established portfolio comprising nearly sixty private loans with an average maturity of two and a half years. Nearly every month, a loan is repaid, providing monthly liquidity of 5%.”
The fund now holds €300 million, but as of now, it hasn’t attracted Dutch retail investors. This opportunity has only recently become available, and Natixis offers it exclusively through private banks and asset managers. Langenberg is confident that this will change, as it was introduced due to interest from relationships that couldn’t access it for their clients.
Regarding the timing of the broader opening of the MV Dual Credit fund amid rising defaults, Langenberg believes that many of the loans in the fund are currently nearing maturity. He adds, “We also believe that 2024 is a good year for private debt, especially in terms of yields compared to risk. Defaults are likely to increase, but in the segments where MV Credit operates, we don’t foresee significant issues.”
A Dutch version of this article originally appeared on InvestmentOfficer.nl.