ELTIF II Regulation and the Retailisation of Private Markets
As the European Council adopts its position on the ELTIF II regulation, many are still asking why there have been so few ELTIF launches since its inception in 2015? We are inclined to believe that the market was not yet ready for the proposition underpinning the ELTIF per se, rather than the ELTIF as an investment fund product.
In essence, ELTIFs make available to the retail audience some investment opportunities – more long-term in nature – before being available only to a specific and more sophisticated audience of professional and institutional investors. The so-called retailisation of private equity is a more recent phenomenon. This being said, the proposed changes as part of the ELTIF II regulation could as well help surfing the wave of this current movement.
It is not only the fact that there were not as many ELTIFs launched in Europe that is of interest, but also that these were concentrated in specific European domiciles both for the establishment and the ensuing distribution. The ELTIF as a concept seems so far to have had more success in southern/continental Europe, where notoriously there is a huge pot of savings available, rather than in the northern hemisphere. That has to do with another issue of perception, which the ELTIF II will attempt to sort out, whereby retail investors are not necessarily used to locking their investment for a period of 6 to 8 years, typically required by this type of underlying investment.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with the ELTIF II Regulation.
The Why of the ELTIF II Regulation
From a technical standpoint, article 37 of ELTIF regulation requires a review of the regulation – by no later than June 2019 – in particular for what concerns the impact of the redemption policy and the life of ELTIFs.
However, there are other forces driving the proposed ELTIF II regulation. The Capital Markets Union, for instance, the European Green Deal and other Union policy initiatives, including the recovery from the recent Covid-19 pandemic. More specifically, the European Council did urge the Commission by the end of December 2020 to prioritise the work on improving the regulatory framework for long-term investments by reviewing the ELTIF regulation and the need to support the non-bank financing of SMEs and infrastructure.
At the same time, there is a very natural link between the ELTIF and the AIFMD. ELTIFs are AIFs in essence, subject to a specific regime. AIFMD is also due a revamp, which will be rolled out in parallel with the ELTIF II.
ELTIF II regulation – dropping the European focus
One of the proposed amendments under ELTIF II is to drop the adjective European contained in the description of the objectives of this investment fund product under article 2 of the current regulation.
We wanted to spend a few words about this proposed amendment. For the ELTIF being a product of the Capital Markets Union, its intended aim was to provide a new avenue of – non-bank – financing to European SMEs as well as European infrastructure and other long-term projects. At the same time, the ELTIF was introduced to offer new investment opportunities to European investors, especially in the retail segment. It would be a fair conclusion to say that dropping the adjective European from the definition of the object of the ELTIF II alters somehow its original proposition.
There is nevertheless a silver lining in this new approach and it lies in the benefits that a growing ELTIF brand could nevertheless offer to the European Union. ELTIFs will still be exclusively European AIFs, managed by European AIFMs and a growing ELTIF industry will mean more European jobs. At the same time, the other side of the original proposition – offering new avenues of investment to European investors – will remain untouched. There will be another upside for the European Union in that the long-term nature of the investments underlying the ELTIF, will make it an ideal choice for investment in sustainable and green projects.
On this point, the whereas to the ELTIF II regulation simply states that it should be therefore allowed for the majority of the underlying investments of an ELTIF, same as the main revenue or profit generation of such assets and investments, to be located in a third country. This approach would also solve one of the main issues that US managers had with the ELTIF, for what concerned the location of underlying investments.
What about the UK cousin LTAF?
The LTAF – not to be confused with the LTIF, which is the onshored version of the ELTIF – is born with a very ambitious goal. It is the first UK fund product, which marks the beginning of a new era for the United Kingdom as a global fund hub. Whilst there are of course a lot of other moving parts to address as part of this endeavour, it is a good first step in the right direction.
I believe that the similarities between the ELTIF and the LTAF are a good enough starting point to attempt to draw a comparison. Where the ELTIF is an EU AIF that can be managed only by an EU AIFM, the same can be said for the LTAF, where only a UK – full scope – AIFM can be the manager. Of course, the LTAF has no passport to Europe, yet it will be required to produce a PRIIPs KID in case it is offered to retail investors, same as an ELTIF.
The ELTIF II proposal also aligns a little more with the LTAF for what concerns the percentage of eligible investments, down to 60% from 70%, closer to the more conservative 50% of the LTAF. More generally, there seems to have been also a different take on the liquidity – or illiquidity – of these long-term funds in Europe when compared to the UK. Whilst we believe that the liquidity aspect might have also been one of the reasons why the ELTIF has not been in favour so far, recent examples of catastrophes for investors in the UK from illiquidity of purposedly liquid products have weighted probably too much in the design of the long-term type of fund in the UK.
Looking at the issue from the perspective of the Capital Markets Union and how to make capital markets more efficient and dynamic in Europe, one way to go would be to balance the illiquidity with the listing on a recognised exchange. We hopefully see more of that for the ELTIF II in the near future.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with ELTIF II Regulation.