As the clock ticks down to the much-anticipated launch of the revamped EU regime for European Long-Term Investment Funds (Eltifs), the private markets world is abuzz with anticipation and a dash of uncertainty.
In less than a week, the Eltif 2.0 regime will reshape the landscape of alternative investments in Europe, opening this once-exclusive domain to retail investors. Yet a haze of legal ambiguity still lingers, adding an element of suspense to the market’s pulse.
Over in Luxembourg, a hive of activity is underway at the CSSF, poised to greenlight a slew of Eltif 2.0 applications, even before the European Commission has adopted the final version of the regulatory standards. Fund managers are on their toes, ready to tweak their strategies at a moment’s notice to align once the impending regulatory framework is finally clarified.
These Eltif 2.0 funds could revolutionise investor engagement in private markets, introducing a mandatory 12-month notice period for redemptions, a bold move by Esma that’s shaking up traditional investment models. This one-size-fits-all approach spans across various semi-liquid, open-ended Eltif investments, ushering in a new era of long-term financial commitment.
Liquid investments
However, there’s a twist – fund managers might have the leeway to shorten this period, provided they play their cards right with liquid investments. Up to 40 percent of liquid assets in a fund could pave the way for a reduced three-month notice period, injecting a dose of flexibility into this otherwise rigid framework. In private markets, liquid investments are hard to find, which means that Eltifs with these shorter redemption periods will be permitted to also hold more liquid assets in public markets such as stocks and bonds.
Esma’s proposition doesn’t end there. They’re setting the bar for redemption frequency at a quarterly maximum, yet leaving the door open for more frequent redemptions in Eltifs with certain special features in terms of liquidity. This strategic move exemplifies the EU’s efforts to tailor national supervision standards, while giving entities like CSSF in Luxembourg potentially room to offer slightly customised deviations.
Beacon of hope for SMEs
Eltifs are not just another financial instrument; they’re a beacon of hope for channelling billions of euros into Europe’s thriving small and medium-sized enterprises. Despite a lukewarm reception since their debut in 2015, the Eltif 2.0 update, taking effect on 10 January, could ignite a spark in the sector.
Luxembourg, a key player in this saga, is betting big on Eltif 2.0. It’s a game-changer for both private and retail investors, making private market investments more accessible than ever. Insurers are eyeing these funds for long-term investment opportunities, and industry giants like the London-based Alternative Investment Management Association are forecasting a surge in the European Eltif market, possibly reaching a staggering 100 billion euros.
The success of Eltif 2.0 hinges on the delicate balance of regulation and flexibility. The European Commission’s final say on Esma’s draft RTS, due by 18 March but possibly earlier, will be the defining moment, potentially sealing the fate of these groundbreaking funds. Esma then will have maximum six weeks to react once that has happened. So as things stand, the market, on paper, may continue to face a bit of legal ambiguity until early May.
Draft RTS draws mixed reviews
This draft, published on 19 December, has received mixed reviews. It’s clearly recognised as a compromise that establishes clarity for open-ended, semi-liquid funds. Investors can invest here without committing to stay in for the entire life of the fund, as is the case with closed funds.
For Brown Brothers Harriman’s head of market intelligence Adrian Whelan, publication of the Eltif RTS was like Christmas had come early. ”The Esma pre Christmas regulatory ’present’ to industry is particularly large this year and it’s only Tuesday 19th!!!!!,” he said on Linkedin.
“The Eltif updates are REALLY positive,” Whelan wrote. ”Basically pragmatic allowance of maximum flexibility and fund discretions to ensure investor protection but also commercially viability / competitiveness of Eltif 2.0 in the market. Makes me even more bullish in Eltifs now for 2024.”
Mathieu Scodellaro, head of the investment funds practice at PWC Luxembourg, said the mandatory, 12-month redemption period “will most likely be considered as major hurdle by the industry for the development of (semi) open-ended Eltif.” He also said that most of the proposed rules will “certainly be seen as a step in the right direction.”
’Not as flexible as expected’
Luxembourg law firm Elvinger Hoss Prussen, in a note to clients, commented that “these rules are not as flexible as expected by the industry”.
The standards, which now need to be adopted by the European Commission before 18 March, clearly reflect a compromise in the European supervisory community.
As Investment Officer reported earlier, financial supervisors in Paris and Luxembourg had different viewpoints on the standards. In Paris, AMF advocated a strict, uniform application, while its Luxembourg counterpart CSSF, supported a flexible approach.
Fair compromise, says AMF
“The RTS also strikes, in my opinion, a fair compromise to give flexibility to the industry while reducing potential liquidity mismatches for open ended Eltifs,” said Jessica Reyes, head of asset management policy division at AMF France, in a comment on Linkedin.
Dutch MEP Michiel Hoogeveen, as the European Parliament’s rapporteur for the new Eltif regulation, described the RTS as “excessively restrictive and unworkable”. On the X platform, he called on European Commissioner Mairead McGuinness to make sure that new rules “respect the flexibility of open-ended Eltifs, promote the uptake of the Eltif 2.0 label and safeguard investors’ interests”.
Many products unsellable, says BlackRock
Major asset managers like Amundi and BlackRock had warned that unclear redemption rules could confuse investors and risked making many Eltif products unsellable.
Paris-based Amundi, Europe’s biggest asset manager, said a 12-month notice period “would be impracticable” with the quarterly redemptions proposed. “It will also create confusion amongst retail investors as the notice period is usually consistent with the redemption frequency,” Amundi said in its consultation response.
BlackRock, the world’s biggest asset manager, told Esma that a “blanket 12-month notice” applying to all Eltifs does not “not appropriately reflect the nature of each fund and strategy, with a risk that a substantial portion of Eltif strategies and product will be considered un-sellable through many investor channels.”
Addressing this industry criticism, Esma referred to the “illiquid nature” of certain assets in which an Eltif may invest, the fact that Eltifs could be marketed to retail investors, as well as international supervisory work on liquidity management conducted at the level of the Financial Stability Board and global supervisor group Iosco.
Prescriptiveness needed, says Esma
“A certain level of prescriptiveness is needed in relation to the requirements on the notice period of an Eltif,” said Esma. Esma nevertheless created an option under which, depending on the length of the notice period, Eltif managers can reduce this period by holding a minimum percentage of liquid assets. “This would still allow to take into account the specificities of different types of Eltifs while, at the same time, ensure investors, including remaining investors of Eltifs, are adequately protected,” Esma said.
Linklaters lawyer Clare Virard-Canto said on LinkedIn that the rules tend “to find the right balance between prescriptive rules and flexibility given to asset managers”. Arendt Luxembourg told clients that the mandatory 12-month notice period, even with its limited flexibility “deviates from current market standards and how private market retail funds are designed, economically and commercially”.