Universal Investment’s Martin Groos unpacks the journey of the European Long-Term Investment Fund (Eltif) since its promising launch in 2015, and explores whether recent reforms under «Eltif 2.0» will finally deliver success.
The Eltif was launched with high expectations in 2015 and the starting point was more than promising. The Eltif created a fund structure with a pan-European distribution licence that gave retail investors access to a broad range of illiquid asset classes, such as investments in infrastructure or renewable energies.
Nine years later, it is obvious that the Eltif has not lived up to its expectations. By the end of 2023, only 95 Eltifs have seen the light of day across the EU, more than half of them in the past three years, according to the rating agency Scope. With few exceptions, there have hardly been any major sales success to date. Scope estimates the volume of the European Eltif market at the end of 2023 at just 13.6 billion euro, a quarter of which is accounted for by the three largest products.
What happened? Even without the Eltif, institutional investors can rely on a well-equipped toolkit to realise their investment strategies with suitable vehicles, as well as notification procedures and comparability checks that allow them to distribute in several European countries with rather little effort. For many small investors, on the other hand, the entry threshold proved too high – in particular the minimum investment amount of 10,000 euro, along with restricted return options.
Eltif 2.0 – a success story?
The European legislator has responded to this: since the beginning of 2024, there is a completely refreshed Eltif regime, «Eltif 2.0». Scope even refers to this as a «new era». The main changes: The regulatory minimum investment amount for retail investors has been dropped, the redemption right has been simplified for investors, and fund managers are more flexible when allocating assets. For example, the selection of asset classes has been expanded and more liquidity and higher leverage ratios have been made possible.
Still waiting for the big run
This removes some of the biggest hurdles for the retail business to date. Eltif could therefore be on the verge of a major breakthrough. In fact, since its launch and now again with the roll-out of Eltif 2.0, a whole range of providers have announced corresponding products. But the big run has yet to materialise, mainly because of the market environment for the launch of new alternative investment funds (AIFs), including Eltif. Sales launches for other vehicles are also often delayed in anticipation of a better placement environment.
And there is another obstacle, of a more technical nature: most sales platforms are not yet geared towards Eltif 2.0. The listing of Eltif products is currently only possible to a limited extent. Suppliers who do not have a strong sales channel of their own are therefore often still reluctant. However, it is to be expected that this knot will be untied as soon as the last technical regulatory details have been finalised and there is sufficient demand and product supply.
Changes will bear fruit in the long term
All in all, however, the advantages of the Eltif in its new form are convincing for small investors: the vehicle enables them to invest comparatively small sums in asset classes such as infrastructure, renewable energies, private equity and similar «real assets» at «semi-liquid» conditions that are comparable to the redemption conditions of the German open-ended real estate funds (OIFs), but also require appropriate liquidity management. Even fund of funds structures can be realised with the Eltif 2.0.
From the fund initiators› perspective, the pan-European distribution licence is particularly advantageous in addition to the expected demand. It makes it possible to target several large European markets and thus generate economies of scale - although it is questionable whether this will be utilised on a broad scale given the different distribution mechanisms in the individual countries and language barriers. It also makes it possible to select the most suitable fund location for the fund launch regardless of the size of the respective domestic market and to distribute it in other target markets.
But it is still too early for a conclusion. Following our forecast and the intense exchange with investors and potential Eltif initiators – we are more than confident that Eltif will gain considerable momentum as a retail product as soon as the general market environment improves and the last bottlenecks in sales are eliminated.
Martin Groos is a member of the management board at Universal-Investment-Luxembourg S.A. The firm is a member of Investment Officer’s panel of experts.