Europe’s fund and asset management organisation Efama, active in the development of the updated European long-term investment fund, expressed strong optimism this week about the updated vehicle’s interest to both professional and retail investors and its ability to fulfill its Capital Market Union aspirations. Despite early questioning of its ability to provide sufficient liquidity to attract retail investors, Efama’s expert detailed how the legislation provides several tools that afford liquidity solutions.
“A key component of the Capital Markets Union is actually the retail investor, and in this sense, the Eltif contributes to the democratisation of private assets because it grants retail investors access to assets where normally only sophisticated investors have access to,” said Stefan Staedter, a partner in Arendt & Medernach’s investment management practice.
The Eltif is the only vehicle allowing for harmonised distribution across the EU through the AIFMD passport, and which, critically, grants access to retail investors, underlined Städter, who specialises in both regulated and unregulated investment fund work, and, as one of his firm’s Eltif experts, advises most of the Eltifs established in Luxembourg.
Increased attractiveness
Evaluating the success of the new Eltif 2.0, Stadter said “There is no doubt that Eltif 2.0 has definitely increased its attractiveness.” The vehicle remains a cross between an alternative investment fund and a UCITS.
From an investment point of view “we have clearly identified a certain simplification and flexibilization when it comes to the asset classes,” said Staedter. Many investment limits have been modified, such as the percentage of assets that can be UCITS-type, more liquid investments, has been raised from 30% to 45%.
Turning his attention to the “distribution side”, Staedter said “there are quite a lot of achievements which are coming with Eltif 2.0 and they make it actually more simple and less burdensome than as some asset managers have seen it in the past. The major change is the elimination of the “minimum investment ticket.”
Democratisation of assets
He pointed out that given the Eltif’s features “you get a strong angle on the democratisation of assets, because the investors will actually be able to have a word to say in terms of savings on a long term basis, and it’s not anymore a sort of privilege for more sophisticated investors.”
Staedter explained that “on the liquidity terms and the exit possibilities,” the Eltif “is now much more flexible.” The new regime makes two provisions that enhance flexibility, redemption and matching.
He explained that “it was always possible to derogate from the rule that redemptions are not allowed during the life of an Eltif, pointing to a provision that existed “since the beginning.” However, he explained that asset managers hadn’t used it much because of a “certain uncertainty about how this rule will apply and how this needs to be tailored.”
More complex liquidity
In any case, liquidity will always be more complex in an Eltif. For example, he said “Eltifs shouldn’t be immediately liquid, there’s always a sort of blocking/locking type of moment, which has to do, obviously, with the idea to build up a portfolio and to keep the capital as stable as possible.” This means that liquidity won’t be possible right away.
Eltif funds, he said, should put into place a redemption policy operated by the AIFM asset manager.
Such a policy can be combined with common liquidity management tools, such as granting credit lines, allow for gating in certain extraordinary situations. The key is “put in place a forecast mechanism, either to have sufficient liquidity in place” to allow for redemptions.
Should a redemption not for some reason be possible at a given time, another option is matching, where an investor transfers, through the fund, the manager or the distributor, his holding to an incoming investor.
“I think we see clearly that investor protection is something which has been taken into account strongly by the Eltif 2.0, together with the diversification rules, the cooling off period, and also together with the fact that we have here a regulated programme which is managed by a regulated manager.”