The European Long-Term Investment Fund (Eltif) regulation, initially introduced in 2015, has been revamped to Eltif 2.0, entering into effect in January 2024. This revised regulation is poised to significantly influence the landscape of private credit investment in Europe, according to Michael George, lead portfolio manager of M&G’s Corporate Credit Opportunities Eltif Fund.
Amid the ongoing volatility in interest rates and inflation, private credit has emerged as a new investment avenue, offering stable income and returns that are not correlated with broader market fluctuations, George wrote in a note to investors. The Eltif 2.0 regulation aims to democratise access to private market strategies, traditionally the domain of institutional investors, by opening avenues for individual investors to participate in these private opportunities.
Private markets have seen substantial growth post the Global Financial Crisis but have largely been accessible only to institutional entities such as pension funds, insurance companies, and foundations. The updated Eltif framework now extends this opportunity to individual investors, allowing them to partake in investments that offer attractive risk-adjusted returns.
Due diligence required
The revamped Eltif 2.0 carries forward the core benefits of its predecessor, widening the definition of eligible assets and reducing the minimum investment in eligible assets from 70 to 55%, with public assets now potentially up to 45% of the portfolio. “Whilst we welcome a widened definition, the lowering of the minimum allocation to eligible assets means investors must do their due diligence to ensure they are selecting the right fund to bring those private asset diversification benefits to the fore,” George said.
This reform is expected to bridge the funding gap faced by small and medium-sized enterprises across the European Union, which constitute 99% of the business ecosystem. By channelling investments to corporations, infrastructure, and real estate, Eltif 2.0 is expected to play a crucial role in stimulating Europe’s real economy.
The removal of the 10,000 euro minimum investment requirement and the introduction of measures to align managers’ interests with those of their clients through co-investment opportunities and enhanced cost transparency mark significant strides towards investor inclusivity and protection.
‘Informed choices’
“As the new regulations expand access to a wider range of clients, it will be more crucial than ever to help investors make informed choices based on their investment needs through better financial education – and that is something that we are committed to doing,” the M&G manager said.
While private credit offers an attractive source of income and diversification, the entry of Eltif 2.0 into the regulatory framework underscores the importance of selectivity and experience in navigating this market. M&G believes that with approximately 16 billion euro in AUM currently managed by Eltif funds and a significant growth opportunity ahead, the landscape for private credit investment in Europe is set for a transformation.
Further reading on Investment Officer Luxembourg:
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