Introduced with a regulation in 2015, ELTIFs is another acronym in the European regulation on financial services and stands for European Long-term investment funds. One of the unique features of this type of funds is that it is open to retail investors. ELTIFs are set to become very important tools for alternative capital raising to finance small and medium enterprises in Europe. ELTIFs marketing in Europe is also sustained by the existing regulatory framework with the grant of a marketing passport.
As ELTIFs gain momentum and many fund houses are considering to launch their own, the scope of this post is to give some of the main quick facts about ELTIFs for US fund managers.
What is an ELTIF and why do we need it?
ELTIFs are EU AIFs established by an EU authorised AIFM. In simple terms, ELTIFs allow for investment into projects and companies that require long term capital. This new type of funds is ideal for investment fund managers willing to offer also to retail investors long term investment opportunities, like infrastructure projects, so far available exclusively to institutional investors.
However, one of the main aims behind ELTIFs is to increase the amount of non-bank finance made available to companies investing in the real economy in Europe. The fact that ELTIFs marketing in Europe is facilitated with the passport will definitively ensure further growth of this type of funds.
Can a non-EU AIFM launch a non-EU ELTIF?
The AIFM directive per se contains rules for the marketing passport to be extended also to non-EU AIFMs, even though the conditions to implement such extension are yet to materialise and possibly never will. The AIFM directive, most importantly, codified some of the principles in terms of marketing under private placement.
The recitals of ELTIF regulation clarify that, even though the external regulatory framework is lent by the AIFM directive, the scope of the ELTIF marketing rules does not encompass non-EU AIFM and non-EU AIFs, nor does it provide for any mechanism to include third country ELTIFs marketing in Europe under either national private placement regime or any other mechanism of extension of passport.
Both the regulation and ELTIFs marketing in Europe are strictly and exclusively Europe-centric and so is the eligibility under the relevant rules.
Are ELTIFs really closed end?
ELTIFs do not grant investors with redemption rights similar to the ones of open-end funds. The rationale behind this approach lies in that the underlying investments of ELTIFs require capital for a certain amount of years and those investments cannot function on the premise that suddenly investors may want to claw back the money initially invested, because they have decided that the particular investment is no longer for them.
However, it is expected that investors will be able to enjoy a premium for the illiquidity of their investment, which will compensate them. Also, as ELTIFs will be able also to be listed on Stock Exchanges, it is possible that a secondary market can develop and consequences of illiquidity be mitigated accordingly.
What do I need to obtain marketing authorisation of an ELTIF in Europe?
In line with the UCITS directive, ELTIF regulation imposes that local facilities will have to be put in place in each of the domiciles where the ELTIFs marketing in Europe is intended to be carried out towards retail investors. The duties and tasks entrusted to these local facilities are by and large the ones already provided for by article 92 of UCITS directive.
The second level ELTIF regulation implemented with the Regulatory Technical Standards (RTS) provides further specification on the duties and requirements of the facilities to be made available to retail investors. The RTS specify that those facilities perform their task a) in person; b) by telephone; c) electronically and, most importantly that the tasks are performed in the local language of the market where the ELTIFs are offered to retail investors. When the tasks of the local facilities agent are outsourced to an entity outside of the group of the ELTIF, the appointment will have to be evidenced in writing.
Lastly, what ELTIFs have to do with PRIIPs?
The regulation establishing ELTIFs specifies that when ELTIFs marketing in Europe is carried out towards retail investors, it is mandatory to produce and publish a key information document under the PRIIPs regulation. This is because ELTIFs are considered to be packaged investment products for retail investors.