The market for European long term investment funds, or Eltifs, is set to triple in the coming years as high-net-worth clients increasingly look to diversify their portfolios by increasing their exposure to private markets, according to US fund manager BlackRock. “We have, I would say, aggressive plans to expand.”
This projected boom in wealth management, in particular in Europe, is encouraged by the recent adoption of a flexible legal framework for Eltifs in the European parliament. Although the updated EU legal setup is only expected to enter into force next year, BlackRock already is preparing to launch a series of four new Eltif funds, it told Investment Officer.
BlackRock makes a clear case for the attractiveness of Eltif funds in a new 16-page report that is released today. The firm, also known as the world’s biggest asset manager, has pulled together a number of third-party studies on Eltifs to demonstrate how private markets can deliver attractive returns as investors increase their allocations.
Closing the gap
BlackRock managing director West Lockhart, who serves as head of wealth and family offices for Europe, Middle East and Africa, said the firm expects markets are going to triple over the next couple of years. The market, he said, is looking to close the gap between the average retail investor which has less than 2% in private assets and wealth managers who would like it to be 10%.
“So this gap between 2% and 10% is certainly part of what’s driving the interest in the adoption on the part of wealth managers,” Lockhart said. “Many wealth managers are seeking to make private markets part of the strategic asset allocation. That is: they’re moving away from selling a product as an individual product and on its own merits, to thinking about it as part of an overall allocation to private markets.”
“We believe that wealth managers need to take what we call a whole portfolio approach, thinking about how private markets fit into the context of their overall portfolio. What contributions to risk and return and resilience do private markets make in that broader context?” Lockhart said.
Access and education
Access and education, he said, are key drivers in this development. In the past, the infrastructure of wealth management, with high minimum investment requirements and a lack of technology to handle the full private market lifecycle, and inadequate understanding among retail investors served as barriers. Education has become fundamentally important to help clients gain a deeper understanding of this asset class and the risks associated with it.
As a private markets vehicle, Eltifs are considered attractive because they can be offered to retail investors across Europe at low minimum investment levels, and with an EU marketing passport that allows for broader distribution. They can also be offered outside the EU under private placement rules, although the major part of the market is seen in Europe, in particular in Italy, Spain, France, Belgium and Germany.
The BlackRock study made clear there will be two different structures for Eltifs: with capital calls or as fully-funded vehicles. The fully funded Eltif has a single capital call upfront and a typically shorter investment period, with a reduced operational burden on headquarters and private bankers. The capital-call model can opt for multiple calls as-needed, can have a longer investment period, and will require the private bankers to manage the calls. “Clients need to consider these attributes carefully,” BlackRock said.
Sourcing and liquidity
Emphasising one of its selling points as a global asset manager - BlackRock managed roughly 8.6 trillion dollars in assets at the end of last year - the firm said investors, known as ‘limited partners’, or LPs, need to question their GPs, the ‘general partners’, on their ability to source quality assets.
Investors also need to carefully consider liquidity. The liquidity of Eltifs is limited which means the product cannot always be sold. Only when the manager considers it suitable he can offer a “liquidity window” during which holdings can be divested. Blackrock said they anticipate that there will be a vetting system as part of a very strict regulatory framework.
“It is absolutely critical that investors understand to what degree does a product offer or not liquidity, and to make sure that, since private markets are inherently illiquid, that clients understand this to avoid misconceptions about what it can do,” Lockhart said.
Out of the four new Eltifs in BlackRock’s pipeline, two will be announced shortly. One of these will be classified under the EU’s Sustainable Finance Disclosure Regulation, or SFDR. The other will have a fully-funded structure. Asked for more details, the firm said it was not able to provide these at this time.
“This just to underscore why we are committed to the market,” said Lockhart. “You know, we have, I would say, aggressive plans to expand.”