Protracted discussions over supervisory standards relating to the liquidity requirements in the EU’s new regime for European Long Term Investment Funds, known as Eltifs, are delaying the launch of new funds for these private asset investments. The delays have led to fundraising uncertainty as the market has adopted a wait and see approach in the light of impending regulatory decisions.
At Schroders Capital, which last year launched its first Eltif fund still under the original 2015 rules, Tim Boole, head of product Private Equity, said Europe risks losing time to truly reform the Eltif market if the uncertainty is not removed soon. This, he told Investment Officer, “ultimately comes, I believe, at a cost to the private investor in the EU because they would have less choice, less access to funds.”
The Eltif2 update was designed to make it easier for retail and high net worth investors to also invest in private markets, a domain long considered exclusive to institutional and professional investors. The regime formally entered into force a month ago on 10 January. The European Commission however still has to sign off on the regulatory and technical standards, known as the ‘Level 2 RTS’ for Eltif 2.
‘All guns blazing’
“My impression around Q2, Q3 [2023] was that most people thought that come January 10 [2024], everything would fall into place and it would be sort of, you know, all guns blazing type approach,” said Boole. “The back and forth which is happening now has created great uncertainty.”
The Eltif standards were drafted by the European Supervisory and Markets Authority, or Esma, just before Christmas. That draft is widely seen as a compromise between those that advocate a flexible approach, such as Luxembourg’s CSSF, and those that want stricter rules, notably French supervisor AMF.
Various Eltif specialists in Luxembourg’s legal community in recent weeks have expressed particular concern with the Esma-proposed rule that would require investors to respect a 12-month redemption if they decide to unwind their investments. Under the Esma draft, shorter redemption periods are possible if a fund invests more in liquid, listed assets.
Anticipating a more flexible Eltif regime per 2024, several major asset managers, including BlackRock and Schroders Capital, launched new funds last year. Only a few weeks after the European Parliament adopted the Eltif2 regime, Schroders launched the Schroders Capital Private Equity Eltif 2023.
With a minimum initial subscription of 10,000 euro, the fund offers access to private equity investments without requirement to invest large amounts or to be a professional investor. Schroders offers the fund that will be investing primarily in small to mid-sized European companies, to clients via its network of private banks and wealth managers.
‘Extra headwind’
The markets long for clarity on the Eltif regulations and a year after the launch, Schroders’ Boole explains that fundraising potential could have been higher were it not for the uncertainty over the Eltif2 regime. “Being in the market with an Eltif in this period where the Eltif2 are sort of being talked about has added an extra headwind to the fundraising,” he explained. “We have had quite a few people that said, ‘you know, I love what the strategy does, but I really would like it to have more flexibility, and legality’.”
The discussions over the new Eltif regime gave investors the impression the change was “just around the corner,” said Boole. But during 2023, private banks increasingly adopted a wait and see approach as it became clear that European national supervisors had different views on the supervisory standards for Eltif2.
Against that backdrop, fundraising for the new Eltifs launched in 2023 became more challenging as Esma found it difficult to secure an agreement among the national supervisors. “My impression is that there is a much larger delta between where Esma is at and where the rest of industry is at than people anticipated.” said Boole.
While the current delay “gives a little bit more breathing space” for the original Eltifs, Boole’s bigger concerns are more long term.
Risk of own goal
”Ultimately, what we really need to make sure is that the Eltif tools are readily adopted because ultimately, the whole purpose of doing this is to encourage and provide greater access for investors to private markets, to kind of break down some of the barriers,” he said. “If the Eltif tools end up being restrictive I am worried it is going to end up being a bit of an own goal.”
Noting strong demand from outside the EU for semi-liquid funds such as Luxembourg-domiciled UCI Part Two structures treated as Alternative Investment Funds (AIFs), which have an investor threshold of 125,000 euro, Boole sees a risk of a two-track system emerging in the market, with international investors from outside the EU being able to enjoy the benefits of private markets while EU-based retail investors can not.
“If we have rules that are more restrictive in the EU, you risk having a kind of two-track system,” he said.