The relaxed rules around Eltifs, the European vehicles for non-listed investments, are leading to a series of new launches. However, not all market players are equally enthusiastic. Many are still adopting a wait-and-see approach.
An Eltif (European Long Term Investment Fund) is the financial instrument the EU devised in 2015 to make investing in infrastructure projects or non-listed companies more attractive to retail investors. Since the initial structure failed to gain traction, some relaxations were introduced in January 2024. The minimum threshold of 10,000 euro for retail investors was abolished, and open-end funds were allowed alongside the closed-end funds typically used for private investments.
These relaxations seem to be having an effect. “Eltifs are finally gaining momentum following recent regulatory changes, with more new products approved in 2024 than in the past three years combined. Although many of the original objectives have not been met, the recent market growth is a sign of confidence,” writes fund comparison platform Morningstar in an evaluation.
The Eltif market has grown by an estimated 54 percent in 2024, reaching 20 billion euro. Morningstar counts around seventy asset managers who have launched an Eltif. Last month, JP Morgan AM joined the ranks, launching its Multi-Alternatives Eltif from Luxembourg, with over a thousand private assets in the fund.
Reluctance to adopt
Despite this growth, doubts remain in the market about the usefulness of the Eltif format. “Is such a new European structure really necessary?” is a question heard among multiple private equity players. While many of their clients are eager for private asset investments, several private banks remain hesitant to incorporate the revamped Eltif format into their offerings.
For example, Edmond de Rothschild Belgium continues to rely on more traditional structures that have already proven their reliability. “We are currently not using Eltifs and are focusing primarily on the more classic setup through feeders and masters. This means ‘classic’ timelines with an investment period via capital calls and subsequent distributions,” explained CEO Kristof Kustermans.
“Eltifs are a diversification option worth considering for non-listed companies for a broader audience due to the lower entry threshold. We are closely monitoring the trend and will adjust our offering when appropriate,” stated major bank KBC cautiously. The bank also emphasized that “for illiquid investments, it always recommends keeping them to a very limited portion of the portfolio.”
Liquid or not liquid?
A heated debate is ongoing about the liquidity of Eltifs—or the lack thereof. The relaxation of regulations in January 2024 opened the door for semi-liquid funds, with exit opportunities subject to contractual restrictions (e.g., only at specific intervals). However, several experts find the term “semi-liquid” too confusing for retail investors.
“We have significant concerns about the ambition to make Eltifs more liquid,” said Olivier Rogiest of the West Flanders wealth manager Quaestor. “How do you make something that is fundamentally illiquid suddenly liquid? The only way out is to include a liquid asset, such as cash, in the fund. But that comes with lower returns. And another issue: what happens if everyone rushes to exit at the same time? Will there be enough liquidity, or will investors get stuck in the same bottleneck?”
“The term ‘semi-liquid’ is misleading because Eltifs are not designed to be liquid like investment funds. They are private investments with a long-term horizon of roughly ten years,” says Raluca Jochmann, head of private market solutions at asset manager Allianz Global Investors.
“Although private assets are less sensitive to economic cycles and uncorrelated with stock markets, it is quite possible that in declining markets, the demand for exits from Eltifs will increase, particularly from underperforming funds. However, investors must understand that gating may occur when too many try to exit at once. This means some may have to wait until the next quarter—or even longer—for their exit.”
Despite European regulations no longer requiring it, Allianz Global still maintains a minimum threshold of 10,000 euro for its own Global Infrastructure Eltif, signaling that the product is not suitable for every type of investor.
“An Eltif is an interesting instrument for introducing investors who have never invested in private markets before. Because it is relatively new, we spend a lot of time educating both investors and the distributors who sell our Eltifs. We expect the Eltif market to grow, but it won’t be a big bang,” said Jochmann. “We are in it for the long haul.”
Management fees
Morningstar observes that management fees for Eltifs are, on average, significantly higher than those for comparable traditional investment funds. This is unavoidable, says AllianzGI.
“The fees for Eltifs cannot evolve toward the levels of the liquid market because managing such funds requires a much higher workload. Finding quality investments in private markets is challenging. Sourcing deals is not always easy. Therefore, larger teams are needed,” Jochmann explained.
“But what matters most to investors is the net return—the gross return minus fees. Since this is a relatively young product, we still have limited long-term track records available on the market. However, over the coming years, we will gain better insight into this. Investors will increasingly be able to see which Eltifs perform better than others. Fund managers will have to face competition.”
“While Eltifs have their advantages, both investors and fund managers need to consider many factors,” summarized Morningstar fund analyst Mara Dobrescu. “When deciding to invest in an Eltif, it is crucial to understand the underlying strategy, liquidity provisions, valuation process, and fee structure of the fund. Investors risk overestimating the potential return of Eltifs after fees and underestimating their liquidity risks.”