Luxembourg’s fund industry has high hopes for Eltif 2.0, the revised European regime for long-term investment funds that is set to be approved next month. Thanks to the updated rules, products like private funds can be targeted directly at retail investors in all 30 countries in the European Economic Area.
The new framework is expected to encourage the uptake of private funds among retail investors, and is seen as a key element in what sometimes is described as the “retailisation” or “democratisation” of private equity. The European Parliament is due to vote on the new Eltif rules during its mid-February plenary meeting in Strasbourg. From there, publication of the regulation is expected in the EU’s official journal. The new regime then is expected to enter into force nine months later.
Luxembourg, home to some 300 management companies and Alternative Investment Fund Managers, already has a market share of 57 percent in the relatively small existing Eltif market, according to the Association of the Luxembourg Fund Industry, Alfi. At the end of 2021, 82 Eltifs were in circulation with net assets under management of 2.4 billion euro. While Luxembourg accounted for more than half, the rest was issued in France, Italy and Spain.
David Zackenfels, senior legal adviser at Alfi, called the foreseen changes “an excellent development to pave the way for a future success.”
Growth expected
“Going forward we expect more asset managers to consider the Eltif as a product for retail investors, offering such investors access to private assets with the necessary investor protection safeguards,” said Zackenfels in a statement.
The EU’s co-legislators - European Commission, parliament and the Council, in which member states are directly represented - in December reached a comprehensive 70-page agreement on the proposed regulation, designed to make investment funds more attractive and easier to invest in. Member states had pressed to include financing to SMEs and long-term projects to help achieve the digital transition included as a priority.
Obstacles removed
As part of the December deal, a 10 million euro minimum size requirement has been removed to help diversify investment portfolios. The maximum market capitalisation threshold for companies in which an Eltif can invest has been raised from 500.000 to 1.5 billion euro in order to provide Eltifs with a better liquidity profile.
Furthermore, a “conflict of interest” requirement has been introduced that says an AIFM managing an Eltif should not invest in an eligible asset other than holding shares in the fund that it manages. Marketing and distribution rules have been upgraded. A 10.000 euro entry threshold for retail investors - seen earlier as “a significant obstacle” has been removed, as has the requirement that no more than 10 percent of a retail portfolio can be held in Eltifs.
Alfi said the revised Eltif regulation is “eagerly awaited” by the industry and that asset managers are gearing up to start upgrading their product offering. Now that the EU legislative process is nearing its end, “the work for the asset management industry and national competent authorities will further intensify,” the association said.
Luxembourg holds majority of market share
“Luxembourg remains Eltif domicile number one with a market coverage by number of funds of approximately 57 percent,” said Emmanuel Gutton, director legal and tax at Alfi. “The Luxembourg investment fund industry is eagerly awaiting the changes to the Eltif regime and geared up to implement the new rules as soon as technically possible.”
Although industry representatives and legal experts herald the updated Eltif regime as one that addresses the shortcomings of version one, it remains to be soon how wide the uptake will be. The failures of the first regime, introduced in 2015, have been widely criticised. Claude Marx, director general of Luxembourg’s financial supervisor CSSF, in 2021 said Eltif “has not been a terrible success”.
While institutional investors already have access to a comprehensive toolbox in terms of available investment vehicles - with Luxembourg’s successful Raif regime as a notable example - traditionally risk-averse retail investors in Europe may be reluctant to invest in products that have yet to demonstrate rewarding track record.