European Long-Term Investment Funds

On June 26^th 2013, the European Commission published a proposal for a regulation on European Long-term Investment Funds ("ELTIF").

The aim of this proposal is to stimulate long-term investment in the real economy through ELTIFs. 

ELTIF funds are designed for either professional/institutional investors (insurance companies, pension funds) wishing to place their capital in long-term infrastructure companies and projects in exchange for regular income or retail investors wishing to save for their retirement.

On April 17^th 2014, the EP adopted amendments to the proposed regulation (the "Amended Proposal"). The Amended Proposal sets out the following key elements:

• An ELTIF fund is an alternative investment fund ("AIF") domiciled in the European Union and managed by an authorised alternative investment fund manager ("AIFM") within the meaning of the AIFM Directive ("AIFMD"). The proposal sets out product rules applicable to AIFs that meet the characteristics of ELTIFs.
• All the rules of the AIFMD apply to ELTIF managers, including the need to appoint a depositary.
• Authorisation: only EU AIFs should be eligible to apply for and to be granted authorisation as an ELTIF. The application for authorisation as an ELTIF shall include information on the identity of the proposed ELTIF manager, its current and previous fund management history and experience relevant to long term investments. For retail ELTIFs, the application should include a description of the procedures and arrangements in place to deal with retail investors' complaints.
• European passport: once authorised in accordance with the regulation an ELTIF may be marketed to professional (and semi-professional) and retail investors throughout the European Union pursuant to a passport mechanism similar to that for AIFs and UCITS.
• Eligible assets: at least 70% of the capital of the ELTIF must consist of:
  1. equity or quasi-equity instruments or debt instruments issued by a qualifying portfolio undertaking and/or loans granted to a qualifying portfolio undertaking by the ELTIF; and/or
  2. shares or units in EuVECAs or in EuSEFs or in other ELTIF, provided that those funds have not themselves invested more than 10% of their capital in ELTIFs; and/or
  3. direct holdings of individual real assets requiring up-front capital expenditure of at least 10 million EUR at the time of the expenditure/acquisition (e.g. property, ships, infrastructure, aircraft, etc.).

Up to 30% of capital may be invested in assets which are eligible for UCITS (money market instruments, transferable securities admitted for trading on a regulated market or MTF, sovereign securities) within the following limits:

1. 10% of the non-voting shares of a single issuing body;
2. 10% of the debt securities of a single issuing body;
3. 25% of the units of a single UCITS or UCI;
4. 10% of the money market instruments of a single issuing body.

ELTIFs are prohibited from short selling of assets, exposure to commodities, securities lending/borrowing agreements, repurchase agreement and using financial derivative instruments, except to hedge the duration and exchange risks.

Projects financed by a public-private partnership shall be granted priority by the competent authorities when examining an application.

• Redemption policy: the proposal precludes an ELTIF from offering a redemption right to its investors before the end of the life-cycle of the ELTIF. The EP has proposed offering redemption rights to retail investors during the life of the ELTIF.  However the European Council disagree with them on this point. 
• Qualifying portfolio undertaking: to be eligible, an undertaking must, inter alia:
  4. not be a collective investment undertaking;
  5. not be admitted to trading on a regulated market or MTF unless it has  a market capitalisation of no more than EUR 1 billion or is considered to be a small or medium enterprise ("SME");
  6. have its head office in the EU or  in a third country that is not on the FATF blacklist;
  7. have signed an agreement with the home Member State of the ELTIF manager and with every other Member State in which the units or shares of the ELTIF are intended to be marketed which provides that the third country is not a country: (i) where there are no or nominal taxes, (ii) where there is a lack of effective exchange of information with foreign tax authorities, (iii) where there is a lack of transparency in legislative, judicial or administrative provisions, (iv) where there is no requirement for a substantive local presence; (v) which acts as an offshore financial centre;
  8. not be a financial undertaking, except a company dedicated to financing infrastructure projects or acquiring/developing/building real assets.

The Amended Proposal is still subject to negotiation at the level of the EP and the European Council and there are already indications that the Council does not agree with all of the amendments proposed by the EP.  The final version is therefore still subject to change.

Links

The full text of the Amended Proposal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.