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Long-term investment funds - ELTIFs

Background

With Europe struggling to achieve sustainable growth and facing significant needs for additional infrastructure investment there has been growing interest in how to promote long-term investment. Encouraging a long-term perspective has also been seen by policymakers as an important lesson from the 2008 financial crisis, which many have argued was driven by excessive emphasis on short-term returns.

In June 2013, the European Commission produced a legislative proposal for a Regulation on European Long-term Investment Funds (ELTIFs) – the first concrete output from the Commission’s work on long-term investment. The intention of the proposal was to establish a European product framework and passport for a new long-term investment vehicle for both professional and retail investors. The ELTIF regime came into effect in May 2015 and ELTIFs became available for use in December 2015 (after the 6 month preparatory period had elapsed).

Under the Regulation, the ELTIF manager needs to be an Alternative Investment Fund Manager (AIFM) and comply with both the provisions of the AIFMD and the additional requirements of the ELTIF Regulation. Optional early redemption rights are permitted under specific circumstances, which is forecast to be in the region of 10 years. Eligible investments are debt and equity instruments in all unlisted companies, listed SMEs, real assets such as infrastructure and real estate, European Venture Capital Funds (EuVECAs), European Social Entrepreneurship Funds (EuSEFs) and other ELTIFs. Private equity and venture capital funds, along with other collective investments such as Undertakings for Collective Investment in Transferable Securities (UCITS) are not included directly as eligible assets.

Invest Europe position

The private equity industry as a long-term asset class is naturally interested in this framework. Invest Europe engaged in discussions with policymakers during the ELTIF’s passage through the legislative process, and highlighted areas where increased flexibility was necessary in the proposal. Thankfully, a lot of these issues have been addressed in the final Regulation.

It is too early to determine the impact ELTIFs will have in the market for long term investment opportunities, but they may prove to be an interesting alternative for some investors.

For managers perhaps the most obvious benefit of the ELTIF framework will be the option that it provides to market funds to retail investors (under certain conditions).

For more information on ELTIF, please visit our FAQ section.