Mobilising long term private sector funding for ambitions such as the green industrial revolution is the stuff of policy makers’ dreams. Retail investors too want options which will give solid long-term returns. The ELTIF was the EU’s effort to give retail investors access to alternative funds, but it has failed to take off. Institutions need to drive reform and uptake.
The desire to tap retail investors to power infrastructure and private equity investments is not new. The European Long-Term Investment Fund (ELTIF) was created in 2015 to allow those with upwards of €500,000 to invest into companies and projects in need of long-term capital injections through fund managers authorised under the alternative investment managers directive. UCITS funds can also invest in these structures.
Although designed for investment in illiquid asset classes, retail investors are given an early redemption option. Only a certain type of assets can be supported, including infrastructure, real assets and certain listed small and medium-sized enterprises.
A flop so far
Yet despite coming into force in 2015, only 28 vehicles are currently listed by ESMA, with a little less than €2bn assets under management in total, compared to more than €18trn in the entire European industry. Ten of these funds are domiciled in Luxembourg. Some major asset managers have got involved – such as Blackrock and Amundi – but interest from others and investors has failed to be sparked. The Commission has just closed a consultation period seeking ideas for reform.
‘Profound changes are necessary to make ELTIFs an EU product of choice,’ commented Federico Cupelli, senior regulatory policy adviser at the fund industry trade body EFAMA. “We advocate a recalibration of the regulation’s asset eligibility requirements, minimum investment amounts and adequate tax incentives,” he said. Perhaps most crucially, a High Level Forum on the Capital Markets Union report from last June cited tax rules at member state level as being a barrier. The report called for member states to adopt preferential tax treatment for ELTIFs.
Reform suggestions
According to Emmanuel Gutton (pictured), director of legal and tax at ALFI, restrictions and complexities such as the suitability test for retail investors, and uncertainties regarding investment rules and duration are the main barriers to investment. Nevertheless, he remains hopeful: “ELTIFs could become a successful third pillar alongside AIFs and UCITS.”
To help make the breakthrough, ALFI has suggested a set of reforms as part of the European Commission’s recently-closed consultation on this vehicle. On the supply side (i.e. improving fund structuring possibilities and eligible assets) ALFI suggested changes including greater flexibility for investment into other funds, practical real asset guidance, a lower minimum investment in real assets below the current €10m, enhanced flexibility regarding borrowing provisions, clarification on whether non-EU investments are permitted, and clarifying the duration of the ELTIF.
On the demand side, they have suggested simplification of marketing requirements to retail investors, such as internal assessment processes and suitability tests, investment advice requirements, and availability of facilities to investors. They also requested flexibility to redeem investments before the end of a closed ended fund’s life should be ‘considered’. How this latter suggestion could be facilitated for long term investments remains to be seen. It brings to mind the liquidity questions related to some real estate funds being open-ended.
Industry effort needed
‘I’m surprised how few ELTIFs have been established up until now,’ said Georgio Medda, group co-CEO at Italian asset manager Azimut, speaking at the ALFI Private Equity & Real Estate conference last November. ‘For a group like ours talking to retail clients ELTIF was the only solution to use for our funds for individual clients,’ he said.
‘We strongly believe that the ELTIF review consultation will lead to changes to the ELTIF regulation with a positive outcome as regards attractiveness for investors and asset managers alike,’ said Gutton. Yet arriving here will take effort from the industry. ‘The democratisation of private market investments will only be successful if institutional investors promote the ELTIF label as a quality label, by investing in ELTIF products themselves,’ he said.