The acronym ELTIF has been popping up on news sites with increasing regularity in recent months. This vehicle has failed to excite the industry since it was launched in 2015, but maybe this is changing. Maybe there more to industry chatter about the European Long Term Investment Fund than boosterism by servicing firms.
“Recent launches in Luxembourg, France and Spain show that the ELTIF, neglected for so long, may now be finding a more receptive audience,” said Eoin FitzGerald, managing director of BBH Dublin, in a recent article.
Three recently in Lux
According to the most recent CSSF data, of the more than 80 funds launched in Luxembourg in the six months to March, there were two new ELTIF s, and these were in October 2020. Last week also saw the announcement of a launch. There were no launches of funds using this framework in the March-September 2020 period. So whether one sees this as a burgeoning niche or a vehicle still struggling to find its place, is probably in the eye of the beholder.
Nevertheless, the two launches in Luxembourg in October were by major players who obviously see potential. Klimavest ELTIF was launched by Commerzbank’s Commerz Real and is intended as an impact fund for private investors with a focus on real assets.
Then the Partners Group Private Markets ELTIF is a collaboration between UBS and private markets investment manager Partners Group. The fund is designed to give UBS private banking clients in Europe and Asia exposure to Partners Group’s private equity buyouts and co-investments. To this one can add the launch on 20 May of an ELTIF in the Grand Duchy by US investment management firm Neuberger Berman, which will focus on private equity.
Retail exposure to alternatives
These match the intended goals of the designers of the regulation: a regulated vehicle for illiquid assets yet with flexible redemption terms, destined for investors with more than €500,000 to invest into SMEs, infrastructure and real assets.
“A vehicle for retail investors to safely invest in alternatives,” was how they were described by Stephen Cohen, Head of EMEA iShares & Wealth business and Index Investments at BlackRock, speaking at the ALFI European Asset Management Conference. Indeed, the industry leading asset manager has itself created two of these vehicles in Luxembourg: one focused on private equity and another on private infrastructure.
ELTIF’s time is now
As the global economy emerges from Covid, the talk is of how this will offer opportunities for private equity to help fundamentally strong businesses to recover, as well as private investors participating in a boom in infrastructure spending.
Added to this, the European Commission is currently reviewing the ELTIF’s regulatory framework to iron out parts of the text which have reduced the vehicle’s appeal so far. In particular, suitability tests for retail investors, and uncertainties regarding investment rules and duration have been cited as difficulties.
Yet if the ELTIF is to make its mark it will do so from a low base. According to ESMA there are only around 30 vehicles on the market with a mere €2bn assets under management in total, compared to more than €18trn for the entire European funds industry.
Substantial scepticism
As well, there are some strong sceptical voices. “Profound changes are necessary to make ELTIFs an EU product of choice,” commented Federico Cupelli, senior regulatory policy adviser at the fund industry trade body EFAMA. He pointed to asset eligibility requirements, minimum investment amounts and the lack of tax incentives being barriers.
It was this latter point that was highlighted by the High Level Forum on the Capital Markets Union report from last June. It said that EU member states would need to act to offer tax breaks to enable significant investment to flow through ELTIFs.
For Guillaume Prache (photo), managing director of Better Finance (the European Federation of Investors and Financial Services Users), there is an even more profound, structural problem with the ELTIF. “It’s not only a question of investment strategy, but also about the distribution processes,” he said. “These are much more costly in Europe than in the US.”
Working to reduce these costs has been an on-going challenge for the industry for years, and effective quick reform can’t be expected soon. More specifically on the ELTIF, Prache was somewhat scathing, suggesting that without substantial change it could be an expensive, cumbersome option. ‘It risks becoming a fund of funds-of-funds’ he said.