Worried about the protection of European investors, illiquid investments, and financial stability, Esma wants its table to be reinstated into the Eltif standards rulebook, although with some significant modifications.
The Paris-based body that coordinates the supervision of Europe’s financial markets on Monday said it disagrees with the “flexible” approach put forward by the European Commission when it comes to finalising the standards for the new category of funds that seeks to open up private markets to retail investors.
In a letter to the European Commission, the European Securities and Markets Authority makes clear it is not pleased with Brussels’ stance on the draft regulatory technical rules - known as the Level 2 RTS - for the EU’s revised regime for European Long-Term Investment Funds, or Eltifs.
‘Balance slightly differently’
Esma said it acknowledges that “an appropriate balance” needs to be found between the protection of retail investors and financial stability on the one hand, and the potential role of Eltifs in boosting capital market finance in Europe. “Esma proposes striking that balance slightly differently from the EC,” Esma said in its opinion.
With the two EU bodies appearing at loggerheads, investors in Europe may have to wait even longer until full regulatory clarity on Eltif2 funds is established. In theory at least, the European Commission can decide to ignore Esma’s opinion. If it does, it has to say so in May. It then could take another three months before the regulation is firm as the European Parliament and the Council - governed by EU member states - in that case could still object and force the rulemakers back to the drawing board.
That could take the discussions on the Eltif standards and rulebook deep into the summer, possibly dealing a setback to the EU’s ambitions of establishing the new regime as an effective way to increase financing alternatives available to European companies. After the European Parliament adopted the amended Eltif rules in March last year, the industry had been full of hopes that the new products, and new financing, could be sold swiftly once the regulation had entered into force in January of this year.
Establishing regulatory clarity is regarded as particularly important for Eltifs after the first generation of this type of product, under the old 2015 regime, failed to take off amid heavy regulatory conditions. In the updated regime, the required minimum investment threshold has been removed and it is made easier to redeem the investment, even with a relatively long redemption period, something that most ordinary retail investors are not familiar with.
Liquidity fears
Esma, considering also the broader discussion on possible liquidity-related financial market problems with open-ended investment funds among financial supervisors worldwide, including the Financial Stability Board, wants to prevent problems and bolster the protection of retail investors by defining clear boundaries and limits with for example redemption notification periods.
Esma in December proposed a mandatory 12-month redemption notice period, an idea that in March was shot down by the European Commission. The Esma proposal “could lead to a misleading interpretation that a minimum holding period is mandatory,” the Commission said on 8 March. “This conclusion would be at odds with the flexibility enshrined in” the actual Eltif regulation.
The Commission recommended removing a disputed table from the RTS proposal that outlined how funds should balance illiquid private market investments with more liquid public investments in cases where the funds’ managers wished to apply shorter redemption notice periods.
Esma now proposes to reinsert a similar table with different definitions. Instead of forcing certain Eltif funds to hold a relatively high percentage of liquid Ucits funds, it has proposed smaller percentages. A fund with a three-to-six month redemption notice period, considered typical for today’s private market practices, would have to hold 15 percent liquid investments, against Esma’s earlier proposal of 27 percent.
Esma’s table proposed on 22 April
Esma’s table proposed on 19 December
In its opinion, Esma also proposed new wording for several other aspects of the Eltif2 standards, including on notification periods to supervisors on material changes, liquidity management tools, valuations and matching mechanisms.
Investment firms across Europe, including heavyweights like BlackRock and Schroders, are preparing to launch dozens of new Eltif funds. Some, including Oddo BHF and M&G, have already done so, and a handful of new funds are due to be announced in the coming weeks, according to one Eltif insider. Most of these funds are closed-end Eltifs that do not yet use the wider market options targeting ordinary retail investors.
The latest fund was presented on Monday, as Pictet Asset Management announced a new Eltif offering investors access to innovative environmental technology investments. The Pictet fund, called Pictet Private Assets SicavI – Environment Co-Investment Fund I Eltif, seeks to raise some 375 million euro as part of a Luxembourg-domiciled structure with a European passport.
In Luxembourg, the main domicile for these funds, some 40 new Eltifs are expected to be launched in the near future.