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Empowering fintechs – the ELTIF story

28 Feb 2022

A few months ago the European Commission put on the table of EU legislators what may be the most growth-friendly legislative piece of the Capital Markets Union package. The “ELTIF revision” – as this piece is called in Brussels circles – was designed to give fund managers an easier time setting up European long term investment funds (hence the otherwise rather mysterious acronym).

From a private equity perspective, the ELTIF label has mostly be seen as an opportunity to target clients that cannot be classified as professional under EU law.

With very limited take-up of the ELTIF vehicle so far, the revision introduced last November aims at broadening ELTIFs eligible investments and operating conditions. Most of the changes put on the table by the Commission fitted with the demands made by Invest Europe on behalf of our industry.

Yet - further to some remaining concerns on fund-of-fund rules - one element in the Commission proposal remained missing: The ability of ELTIFs to invest into all types of innovative fintechs. ELTIFs rules still prohibit investments in “financial undertakings”, i.e., in all firms that operate under one of the many EU financial licenses.

Fund managers can freely use the ELTIF vehicle for investments in smaller fintechs, but rules still prevent managers from investing in fintech companies that may at some point receive - or have already received – one of these licenses. On top of this, these same rules make it incredibly hard for funds-of-funds to become ELTIFs given their wide- and wisely diversified portfolios. All of this will effectively undermine the ELTIF attractiveness from the fund manager’s perspective.

But that is not even the key concern EU lawmakers should have.

Taking a step back, the “financial undertakings” prohibition raises a somewhat philosophical/mostly economical question: which investments contribute to the real economy? We at Invest Europe (please note the name “Invest” and “Europe”) would argue that the current ELTIF calibration may not give the perfect answer to that question.

Distinguishing between biotech or renewable energy investments and fintech investments does make sense when it comes to political priorities, from health to climate change and the digital transition, but ELTIF is voluntarily (and rightly) agnostic in that regard: its purpose is to allow investments that support sustainable growth as a whole – not to favour certain types of investments.

Whatever their size, fintechs are and will remain a key driver of the European tech economy, an agent of positive change and an important component of the EU goal to achieve its technological objectives. As pointed out by the European Fintech association (EFA), fintechs can also promote financial inclusion and give an easier access to finance to new consumers. They can also support one of the Commission’s core objective when it comes to financial services, as they promote everyone’s financial literacy by providing “easy read/use application”.

Finally, helping fintech institutions to grow from small market entities to larger global players is a choice of strategic importance for the EU. At a time where US firms fully dominate the digital transition, creating European fintech champions has never been as necessary. For this, fintechs need to become bigger and stronger. more investments need to flow in the sector. For this, ELTIFs is and remains the perfect vehicle.

Broadening the ELTIF eligibility criteria to all types of fintechs would be a small but relevant help for the continent in building an ecosystem fit for the 21st century… which is already 22 years old, so... What are we still waiting for?

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