With the official launch of Eltifs 2.0 in early 2024, the private semi-liquid private funds market is undergoing a revival, both in terms of products and assets under management.
In both private equity and private debt, the share of investments in private markets has grown significantly over the past decade, outperforming traditional asset classes. According to Jan Longeval of Kounselor Consulting, “institutional managers have long been interested in these asset classes, as evidenced by the annual surveys of Belgian pension funds conducted by PensioPlus.”
However, he notes that this movement is still relatively modest. Private assets still account for less than one per cent of their assets. The situation is slightly different for Belgian family offices, where a recent UBS survey showed that Belgium is well ahead of other countries.
On the chain
In the past, private markets were reserved for institutional investors or very wealthy individuals due to the relatively high cost of entry. In 2015, the European Union sought to democratise access to these markets with the introduction of European Long-Term Investment Funds, or Eltifs. The aim was to mobilise non-bank savings to support the financing of the real economy, in particular infrastructure projects and SMEs.
However, these products lacked flexibility and were subject to numerous regulatory restrictions. The number of products launched in this segment, mainly in Luxembourg, did not exceed a few dozen, prompting the European Commission to launch a new version of these regulations, which will come into force at the beginning of 2024.
New playing field
These Eltifs 2.0 benefit from a general relaxation of the rules, particularly in terms of marketing. This includes a separation between retail and institutional products, with different rules for each type of investor, and more flexibility for management. The new legislation abolishes the minimum amount of 10 million euros per asset held by the fund. It also reduces the proportion of the fund invested in long-term illiquid assets from 70 per cent to 55 per cent, while increasing the proportion invested in other assets (investments in listed equities) from 30 per cent to 45 per cent of assets under management.
In the listed portfolio, managers can opt for market capitalisations of up to €1.5bn (up from €500m) to mitigate liquidity issues. They can also take on debt or invest outside the European Union. This greater flexibility allows for better diversification of portfolios into new market segments. As well as improved liquidity, managers can create a secondary market for their Eltifs or open the door to an early exit.
Although Eltifs are theoretically accessible to a wider range of investors, these closed-end funds remain illiquid investments, with capital often tied up for around 10 years. These products are therefore becoming increasingly popular with private banks, where clients are often already familiar with the private market.
Many launches
According to Scope Group, the size of the Eltif market will grow by more than 50 per cent by 2022, from €11.3 billion in assets under management at the end of last year. In its base case, the consultancy estimates that the market could reach €35 billion by 2028. In the most optimistic scenario, it could even reach €50 billion.
The number of Eltifs has already increased significantly in recent months. In March, Goldman Sachs AM launched its first private equity and private credit Eltif, raising EUR 200 million. M&G Investments recently launched an Eltif on European private credit markets with a target subscription of EUR 500 million. Finally, Schroders has launched its European private equity Eltif. Many other managers are preparing to enter this segment, including UBS and JP Morgan Asset Management.
Strong growth
Fiona Hagdrup, Leveraged Finance Fund Manager at M&G Investments, points out that “despite strong growth in recent years, the proportion of assets invested in private markets is still small compared to total financial market assets. However, opening up the asset class to a wider audience is a welcome development for a healthy market.”
The private equity market has performed very well over the past decade. “There is no reason to believe that this will not continue in the future,” said Rainer Ender, Global Head of Private Equity at Schroders Capital. The semi-liquid solutions coming to market are good solutions for retail investors, but should be reserved for sophisticated investors with long-term investment objectives.