Quiet optimism in the Luxembourg fund industry suggests that proposed tweaks to the ELTIF regime could unlock this concept’s potential. Wealth managers report growing demand for funds that can give clients exposure to alternative strategies, and new suggested changes could do the trick.
“There is demand,” said Marcus Peter, a partner with GSK Stockmann Luxembourg, discussing the concept of the so-called “retailisation” of alternative fund strategies at the recent ALFI PE & RE conference. “I participated in a recent ALFI roadshow to Scandinavia, and bankers and asset managers all told us this is on the agenda: finding ways to bring retail investors to those asset classes.”
Retailisation
He and his fellow panellists were quick to point out that “retail clients” in this context means at least high net worth individuals. Alternative investment funds (AIF) under AIFMD are intended for institutional clients, hence why in 2015 the EU created the European Long-Term Investment Fund (ELTIF) as a half-way house between the AIF and fully retail UCITS products, with an EU cross-border passport.
These are closed-ended funds, where investors agree to tie their money up for a number of years, thus facilitating long term investment in the likes of growth companies, infrastructure projects, home building etc. The only possibility to exit is with the agreement of the fund and its other investors, or via the secondary market with sale to a third party.
Slow ELTIF growth
The ELTIF’s progress, however, was stymied by a series of regulatory complications and inflexibilities that made these products unappealing for asset managers and clients alike. So while assets under management in Luxembourg-based real estate funds rose 14.8% last year, with assets in private debt funds up 40.6%, growth of ELTIFs has been tepid.
ESMA points to just 57 ELTIFs across Europe at the end of October: fewer than the number of real estate investment funds created in Luxembourg last year. Assets under management were a mere €2.4bn, with domiciliations in just four member states: Luxembourg (26), France (16), Italy (13) and Spain (2).
Reform proposals
Reform has been proposed as part of the EU’s Commission’s so called Capital Markets Union 2.0 Action plan published late last month. The potential investment universe would be broadened through clearer, more simplified definitions of eligible assets. Currently, managers are tied to having to invest at least €10m in given assets, but to increase flexibility, this figure would be cut to €1m. Similarly, rules about diversification and borrowing limits for professional investors would be waived.
Current limits on the retail investor would be abolished, including the initial minimum investment threshold of €10,000 and the need for clients to have no more than 10% of their financial investment portfolio in ELTIFs. The new rules would also allow EU AIFs to become “feeder funds” if they comply with ELTIF rules. Fund-of-fund strategies would also be recognised. There are also some clarifications about how Mifid rules would be applied, rules about conflicts of interest, increased thresholds under the diversification rules, borrowing limits, and redemption mechanisms.
ELTIF’s time has come
Discussion about retailisation has grown in recent months. “This is, I think, mainly because prominent private equity and real estate firms are entering this market, and looking at solutions to liberate dormant savings,” said Joachim Cour, a partner at Elvinger Hoss and Prussen. He noted that, at the moment, this is happening with direct contact by asset managers to private banks and the like.
Cour spoke up for Luxembourg “Part II” funds “which are our domestic alternative investment fund that may be offered to non-professional investors across the EU.” Although somewhat out of fashion in recent years, he pointed to a resurgence of interest due to these vehicles having a track record, a degree of flexibility, and CSSF supervision. However, he would like to see some revisions, such as the ability to link these funds to partnership structures.
Peter said the big advantage of the ELTIF is its clear legal framework. “These proposals look like a good new approach to bring this vehicle finally on track,” he said. “It’s a good alternative to existing vehicles.”
The panel also looked at the UK aspect, and how fund regulations are beginning to diverge. So rather than the ELTIF, the UK has opted for an analogous product: the LTAF (Long-Term Asset Fund). “The UK is moving in very similar areas to the EU, but we’ll end up with just slightly different regimes,” noted Charlotte Chopping of Clifford Chance in London.