Less than a month after the European parliament adopted its updated regulation for Eltifs - the European long-term investment funds - the new framework may be showing its first cracks. The lack of liquidity remains problematic, and that makes it unsuitable for private investors.
The new rules have not fully addressed the need to improve liquidity, leaving the democratisation of private equity still further away than desired, Schroders’ head of institutional sales in the Benelux, Wim Nagler, told InvestmentOfficer.nl. The appeal of Eltifs, he said, is largely for clients of private banks and wealth managers.
While Nagler sees benefits in the relaxation of rules around the composition of Eltif portfolios and the simplification of subscriptions by investors, liquidity remains an issue. “This will boost both the supply and demand sides,” Nagler said. But a real broad breakthrough, which Nagler hopes for, will not happen yet, he said, because liquidity is expected to remain limited.
Market finance
In mid-February, a majority of the European Parliament voted to improve the Eltif, introduced in 2015, which is designed to encourage long-term investment to support a sustainable, inclusive and resilient economic recovery. The intention of the reform is to remove obstacles in order to channel additional funds as market finance towards SMEs. The current €7.5 billion in Eltifs, should rise to €100 billion, according to MEP Michiel Hoogeveen, who coordinated the EU negotiations in recent months.
While Eltif 2.0, which will apply from January 2024, will indeed be more flexible in terms of investment structures and have to adhere to less strict rules, Schroders’ Nagler doesn’t agree this will allow the vehicle to target smaller investors directly.
Eltifs remains closed-end
For while indeed several thresholds have been lifted - the mutual funds no longer have to invest mainly in Europe and they are allowed to draw a line under their €10,000 entry threshold - Eltifs are still not allowed to abandon their closed-end structure.
“The main reason why success has been lacking for Eltifs in recent years thus remains in place,” said Nagler. “It would be nice if a next review were to offer real liquidity, as is the case with the products that exist for semi-professionals. There, you can get in monthly and get out quarterly.”
Evergreen structure not permitted
All you are allowed to do on liquidity with the new rules is offer the natural liquidity you get when you sell a business, Nagler said of the adjustment that 20 percent can be in liquid assets. “And you can invest 20 per cent in Ucits products, so you can liquidate them quickly if you want.”
But, he said, “still you are not allowed to offer an evergreen structure where you reinvest continuously and offer liquidity in the form of, say, a quarterly exit point in the interim. It’s logical that you don’t want investors pulling away when you set up a structure that aims to provide sustainable capital to SMEs, but if you want to attract average individuals, this is a missed opportunity.”
Although industry group Efama embraced the revisions in February, noting that Eltifs provide access to “the virtually untapped retail market for long-term investments in real assets”, Nagler said that the purpose of an Eltif partially clashes with the purpose of a regular saver.
Patient capital
“The purpose of the Eltif is to mobilise savings and convert them as ‘patient capital’ in SMEs in particular. However, the goal of most savers is to have ‘some’ form of liquidity. The average saver wants to be able to access their pennies, while Eltifs do not actually offer liquidity. The new rules don’t really cater to that.”
Some opportunities for small investors who wish to invest in private markets remain, Nagler said. Yet, while the entry threshold of 10,000 euros will be removed, banks will continue to discourage their smaller retail customers from investing in an Eltif even in the new situation.
“Since they want to protect their customers from an unwarranted expectation of liquidity, our hunch is that banks’ compliance departments will reserve Eltifs for customers who are more likely to fall into the private banking segment and have at least 100,000 to 250,000 euro of investable assets,” said Nagler.
No gigantic sums
The enthusiasm for the new Eltif recently launched by Schroders, aimed at lower and mid-sized private equity buyouts and growth investments in mainly Europe, comes in almost all cases from private banks or wealth managers, said Nagler, referring to portfolios starting from 200,000 or 250,000 euros. “We are not yet aware of any retail banks wanting to put this on the shelf.”
Schroders’ Eltif has target assets of 200 million euros. “It is open until November. Or September, should it be so successful that we close early because the SME universe cannot handle huge sums of money and we want to invest quickly. After all, where classic funds take 12 to 14 years, with an Eltif you have to be able to guarantee that people get out in 10 years.”
MEP Hoogeveen spoke of 100 billion euros to be invested in SMEs. Is there that much up for grabs? Nagler: “No. SMEs in Europe are big, but most companies don’t want to dilute their shares. What we can take advantage of, however, is the fact that the baby-boom generation is nearing retirement and many business owners are looking for an acquisition party.”
Although Nagler himself is obviously enthusiastic about Eltifs as a provider, he does not see the mountain of European savings moving just yet, let alone mountains of funding applications from SMEs waiting for fund managers. Who knows, at the next European Commission review. But, Nagler said, that could take another five years.