With the European Commission confirming on Tuesday that the Level 2 Regulatory Technical Standards (RTS) for the revised European Long-Term Investment Funds (Eltifs) regime are on track, the alternatives industry is shifting its focus towards overcoming operation challenges such as on co-investments, liquidity management and handling different tax regimes across the EU market.
The finalisation of these regulations marks a major milestone for asset managers and investors alike, particularly high-net-worth individuals (HNWIs) and retail investors, who now have new avenues to diversify portfolios into long-term alternative assets. However, alongside these opportunities come significant operational challenges, which industry experts are already warning about.
“This is a real step forward in making private markets accessible to a broader range of investors,” said Salvatore Sberna, head of alternative investments at Azimut Investments, in an Efama webinar on Tuesday. “We’re moving from the ‘democratisation’ of private markets to the ‘mutualisation’ where institutional and retail investors can participate side-by-side.”
Next steps
The European Commission’s amended proposal, submitted on July 22, outlined the liquidity criteria for semi-liquid funds, a key feature of Eltif 2.0. The European Council and Parliament had three months to object, but no objections were raised, paving the way for the regulation to come into force.
Ivan Kuznetsov, policy officer at DG Fisma, commented during an Efama webinar: “I’ve been checking my mailbox constantly, and there’s no sign of scrutiny or its extension. The next step is publication, which will happen shortly.” While Eltif 2.0 was expected to be operational earlier in the year, this confirmation ensures that semi-liquid and evergreen structures will soon be available, providing the flexibility that investors have long sought.
“It is time for the European asset management industry to seize this opportunity by tailoring their investment strategies to deliver new propositions to investors.”
Martin Merlin, director financial markets, European Commission
The revised regime is designed to attract a broader range of investors, particularly non-professional ones. But as Kuznetsov highlighted, while Europe’s 930 billion euros in retail alternative investment funds (AIFs) present significant opportunities, success will only come with careful groundwork. He noted that for Eltifs to become a real driver in the economy, asset managers must be operationally ready to handle the complexity these funds introduce.
Operational creativity
The finalisation of Eltif 2.0 has been widely welcomed by asset managers. Martin Parkes, co-head of Blackrock’s EU policy office in Brussels, described the regime as a “turbo passport” for alternative funds. He noted that “an awful lot of activity is going on” within the industry to prepare new Eltif products. However, Parkes and others have cautioned that the operational challenges ahead require innovative solutions to avoid bottlenecks.
Eltif 2.0 introduces semi-liquid and evergreen structures, which aim to provide more flexibility than the closed-end alternatives that have characterised the Eltif market since its launch in 2015. The original framework struggled to gain traction, with only 81 funds launched by 2022, attracting just 7.4 billion euros. Strict rules on diversification, leverage, and investor access made the original structure unattractive for many institutional investors and HNWIs.
“There’s a lot of potential in the framework for broader asset allocation and co-investment, but managing liquidity and ensuring alignment with different tax regimes across the EU remain key hurdles.”
Chrystelle Charles-Barral, Neuberger Berman
The removal of the 10,000-euro minimum investment threshold for retail investors under Eltif 2.0 will likely attract a wider audience. However, Chrystelle Charles-Barral, managing director at Neuberger Berman, emphasised that this increased flexibility comes with its own set of challenges. “There’s a lot of potential in the framework for broader asset allocation and co-investment,” she said, “but managing liquidity and ensuring alignment with different tax regimes across the EU remain key hurdles.”
Liquidity and flexibility
Eltif 2.0’s introduction of semi-liquid and evergreen structures allows investors to access long-term assets while retaining some liquidity. This feature may appeal to HNWIs, high-end retail investors, and family offices, but liquidity management remains a challenge, especially during periods of market stress.
While the regulatory changes introduce flexibility, they also add operational complexity. Asset managers must balance liquid and illiquid assets, conduct stress testing, and ensure liquidity to handle redemptions. Careful portfolio management is essential to navigate these challenges.
“There is a trade-off between liquidity and return, and we need to be very clear with investors about that,” said Stéphane Blanchoz, head of alternative solutions at BNP Paribas Asset Management. “The new regulations provide tools to manage liquidity, but asset managers have to use them responsibly.”
Growth projections
As of August 2024, 132 Eltif funds have been established, with Luxembourg accounting for nearly two-thirds. Growth projections estimate Eltif assets could reach 100 billion euros by 2028, but some question whether this optimism is justified.
Neuberger Berman’s Charles-Barral said particular challenges remain around co-investment opportunities and passporting due to differing tax regimes across the EU. She stressed the importance of aligning tax regulations across member states and addressing the complexities of niche strategies, especially with interest from third countries.
Loredana Carletti, co-head of business and product & head of real assets at Amundi Luxembourg, highlighted liquidity management as crucial. The balance between time and return remains key for investors, she noted. She also pointed out that the updated framework allows for broader strategies, appealing not only to European investors but also those outside the region. Additionally, she pointed out that the updated regulations simplify investment in third countries, including African markets, making private market investments more accessible.