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Reviewing ELTIF: targeted changes or complete overhaul?

21 Sep 2020

A slow start…

It has already been more than 5 years since the ELTIF label was created to ensure fund managers with a long-term horizon had the right outlet for their investments. The goal was then first and foremost to allow AIFM-authorised managers to market more easily to retail investors and to access new markets by benefiting from the strength of this brand. Half a decade after the label’s inception, it is perhaps too optimistic to announce that ELTIF has been a tremendous success. With only around 30 funds using the label in Europe - compared to more than 200 EuVECAs - and with a presence in only a handful Member States, the label still has to grow to match the success that made UCITS an international, recognisable brand and the political ambition tied to it from the beginning.

Nonetheless, saying the ELTIF has been a swing-and-a-miss is a clear exaggeration. Interest in the market has been picking up over the last few years and we see more and more managers, who are interested in offering their products to private individuals, cross the Rubicon and start to set up these vehicles.

…but a bright future?

This demonstrates that, with the right incentives, ELTIF serves a purpose. But the €1 trillion question remains: what are the right incentives? This is what EU policymakers will have to determine as part of the recently announced review to achieve the CMU overall objective to foster long-term equity investments. If ELTIF is a (literal) vehicle for change in terms of retail exposure to equity markets, the Regulation’s review, part of the CMU Action Plan published this week, will inevitably be the (proverbial) vehicle for leading towards such a change.

To ensure the success of the voluntary brand, EU policymakers will have to listen carefully to managers on the sections of the Regulation they are hoping to see tweaked or overhauled.

With this in mind, Invest Europe already conducted an initial survey with its members. Results demonstrate that the managers expect two main types of changes. In priority, they ask for the framework to become more attractive, either from a tax, prudential or marketing perspective. But many of them also express the view that the current portfolio composition and eligible investments criteria should be softened and more closely mirror existing market practices. For example, it should be easier for an ELTIF to invest in other ELTIFs or EuVECAs. A second survey has also been launched to assess the appetite of private equity individuals for investors that are not deemed as professional, in particular in light of the regulatory requirement (such as the production of a KID) that are attached to marketing to them.

Looking at the review from a broader angle, lawmakers will also have to take into consideration that, irrespective of the changes that are made to the ELTIF criteria, they will never be the panacea. As we explained in a previous blog, a more appropriate categorisation of investors would go a long way in solving access to sophisticated and knowledgeable individuals. Meanwhile, retail marketing implies so many requirements – sometimes for the very good reason of protecting investors sufficiently – that it may be worth considering adding elements to the ELTIF that would make it easier for managers to market to retail.

There may still be a long way for the ELTIF to become the go-to brand even after additional changes are introduced – but after all: it must be in the very nature of a long-term product that it … takes time.

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