Luxembourg is strongly enthusiastic about the prospects of the new Eltif 2.0 regime as experts here point to untapped demand for such a product in Europe. While acknowledging the oft-mentioned concerns about the lack of liquidity for retail investors, last week’s investment fund event hosted here by Clifford Chance found that solutions could be found. Investors though would have to be open-minded, and some in-built tensions need to be addressed.
Polling views on the success of the Eltif 2, the firm’s partner Emmanuel-Frédéric Henrion found strong optimism for the updated product among the assembled speakers. Counsel Christian Lennig of Clifford Chance discussed the Elitif as a component of the “big trend for the moment” of “retailisation”.
Many changes had been introduced to make the Eltif more interesting to investors, he noted, but while most of what Eltifs do can already be done for professional investors, the real interest for the product remains with retail investors.
Inbuilt tensions
“The specific issue with the Eltif is that it has some inbuilt tensions: we have retail investors, which are used to liquid products, Ucits, basically and now we are supposed to invest into an illiquid, at least semi-liquid product,” said Lennig.
Lennig also touched on related issues: alternative investment managers used to dealing with a handful of professional investors facing the prospect of “many retail investors.” He also flagged issues with distribution.
“I think that the success of the Eltif depends on whether we find good answers to these tensions,” he said.
Finding a way
Dealing with liquidity is one of the criteria for launching a successful Eltif, said Jan Grabbe, partner with Clifford Chance, speaking at his firm’s funds conference in Luxembourg last week. Anyone seeking to launch an Eltif needs to deal with private investors’ liquidity expectations, he said.
“It’s also about the rules, the framework, the legal framework, but it’s also how to reconcile the illiquid asset classes on the one hand and the expectation of private investors with an investment horizon which is not 20 or 25 years.”
However, Grabbe didn’t see this as impossible to resolve. “I think it needs some clever thinking, some, some open mindedness on part of the investors.” He said it depended on the asset class: if you’re launching a venture capital Eltif, it would have to be a closed ended fund. “For infrastructure, for real estate, perhaps there are some clever ways to do a semi-open ended vehicle.”
However, Lennig that liquidity isn’t a show-stopper for the Eltif. “I think the market seems not to focus too much at the moment on the difficulties, but there’s huge momentum for the Eltif working in favour of the Eltif, he said. “This should also not be underestimated.”
Cross-border opportunities
One huge advantage for the Eltif is that “Eltif is almost the sole possibility to market a non French fund to retail investors in France,” said counsel Marie Preat of Clifford Chance.
“In France there is a huge amount as you may know of savings that are available to be invested and also an important appetite from retail investors to invest in the private equity market more widely,” said Preat. “I’m quite optimistic about the Eltif 2.0. Because I believe that this reform will open more widely the doors of the French retail market to European funds.
In Germany, according to Grabbe, who discussed the local market retail fund products in Germany, with no EU-wide products available, unlike in the securities space. “I’m optimistic that Eltif could fill the gap, be a wrapper, be a vehicle retime for retail money in the alternative, illiquid asset space.” He said he expected most of the products aimed at the German market to be launched from Luxembourg.
Premature discussion
Much of the discussion about Eltif 2.0 is premature, because the European Securities and Markets Authority, Esma, has yet to publish its RTS. “Eltifs marketed to retail investors as well, which have to comply with the full set of rules. Now, what the full set of rules is we do not yet exactly know, because we are still waiting for Esma’s RTS which will clarify a lot of the details which are currently open.”
“I believe it will be very interesting to read the Esma RTS,” said Henrion.
The Esma standards are expected around the summer, ahead of the implementation of the updated Eltif regulation from the beginning of 2024. The European parliament adopted the new regulation last month.