By agreeing a format that aims to channel more funds towards small and medium-sized companies, the European Union has reached a political agreement that brings the relaunch of European long-term investment funds, a type of investment vehicle known as Eltif, one step closer.
The tweaks in the EU’s Eltif regime created in 2015 are seen as a major step. The changes will make it easier for retail investors to become active in private equity and involve removing relatively high entry barriers . The European marketing passports for Eltifs are regarded as a major business opportunity for Luxembourg firms.
Negotiators representing EU member states and the European parliament, together with the European Commission, reached a long-awaited political agreement on 19 October, embracing legal changes that will make it easier to market Eltif funds to both retail and professional investors.
‘Largely unknown’
“We have decided to make European long-term investment funds more attractive and easier to invest in,” said Zbyněk Stanjura, Minister of Finance of Czechia, which holds the EU’s rotating presidency. “This category of funds is at present largely unknown due to obstacles in its regulatory framework which we have agreed to remove.”
Eltifs are closed-ended funds where investors agree to tie their money up for a number of years, thus facilitating long term investment in the likes of growth companies, infrastructure projects, home building etc. The only possibility to exit is with the agreement of the fund and its other investors, or via the secondary market with sale to a third party.
The Eltif’s progress so far has been stymied by a series of regulatory complications and inflexibilities that made these products unappealing for asset managers and clients alike. There are currently only 68 Eltifs set up in Luxembourg, France, Italy and Spain, with 2.4 billion euro in total assets under management, according to law firm Linklaters. Under the 2015 rules, retail investors with financial portfolios smaller than 500,000 euro could not invest more than 10 percent of their portfolio in an Eltif and needed to invest at least 10,000 euro. This requirement now is being removed.
Channelling funds to SMEs
One of the key priorities for member states now is reflected in the text: a redesign of the Eltif framework which will allow channelling more financing to small and medium-sized enterprises and long-term projects which will help achieve the digital transition, Stanjura said.
The agreement among the EU’s co-legislators clarifies in particular the scope of eligible assets and investments, the portfolio composition and diversification requirements, the conditions for borrowing and lending of cash and other fund rules, including sustainability aspects. The package also includes rules to make it easier for retail investors to invest in Eltifs while ensuring strong investor protection.
EU policymakers believe that, since ELTIFs are designed to channel long-term investments, they are well placed to help finance inter alia the green and digital transitions. They can be an important vehicle for channelling financing to small and medium-sized enterprises and long-term projects such as transport and social infrastructure, sustainable energy generation or distribution.
Final adoption next
Following last week’s political agreement, the finalised text will be subject to technical and legal revision and then submitted to the European Council and the European Parliament for final adoption, likely before the end of the year.
Eltifs may be marketed as alternative investment funds by Luxembourg firms with legal status as Alternative Investment Fund Manager, known as AIFM. Those who do so are required to notify Luxembourg’s supervisor CSSF, as per the regulator’s circular 22/810.