In 2015, Regulation (EU) 2015/760 introduced the EU-based private investment fund regime to boost long-term investments through alternative investment funds based in the EU (the "ELTIF Regime"). A defining feature of the ELTIF Regime is that ELTIFS are allowed to use an EU retail marketing passport, provided that certain additional marketing rules are observed.
The ELTIF Regime has gained some momentum over the last couple of years where the number of ELTIFs has been growing. However, the regime has not been the success and market driver that it was initially expected to be - potentially because of overly restrictive investment rules, strict risk diversification requirements etc.
ELTIF 2.0 - Increasing flexibility
At the end of 2022, the EU Parliament and Council agreed on a provisional text aiming to update the ELTIF Regime and make the ELTIF rules less restrictive for asset managers.
In broad terms, the new and updated ELTIF Regime is expected to offer a more attractive fund structuring framework for long-term investments, including by easing the restrictions on the investment strategies that may be pursued by an ELTIF and by improving the access to market ELTIFs to retail investors.
Some of the main improvements are:
- The requirement for an ELTIF to invest at least 70% of its capital in "eligible investment assets" will be reduced to 55%.
- Risk diversification requirements, acquisition limits and restrictions on the use of leverage will become less restrictive.
- Retail marketing rules become less restrictive offering improved access, e.g. by removal of (i) the previous entry ticket size, and (ii) the 10% exposure cap.
- An ELTIF will now be permitted to have an investment strategy of investing mainly outside of the EU (but the prohibition against investing in high-risk AML jurisdictions and in countries listed by the EU as non-cooperative jurisdictions for tax purposes remain).
- The cap on market capitalisation of listed qualifying portfolio undertakings will be increased from EUR 500 million to EUR 1.5 billion (measured at the time when the initial investment is made).
- Investments in AIFs will be permitted provided that such AIFs invest in "eligible investment assets" and/or in UCITS investing in "eligible investment assets" on a "look-through" basis (and provided that such AIFs/UCITS do not themselves invest more than 10% of their assets in other funds). This will enable feeder funds to use the ELTIF Regime.
- Feeder funds will be permitted to rely on the ELTIF Regime for so long as both the master fund and any relevant feeder fund qualify as an ELTIF.
- Structural flexibility is increased as minority stakes in a listed qualifying portfolio undertaking may now be held via SPVs, and it is specifically pointed out that ELTIFS may invest via intermediary entities, SPVs, aggregator vehicles and holding companies.
- Co-investments made by the ELTIF manager (or any affiliates and its staff) will be permitted.
- Investments may be made in certain simple securitisations, environmentally sustainable bonds, and financial undertakings.
- EU-authorized AIFMs of another EU Member State will no longer have to be approved by the supervisory authority in the EU Member State in which the ELTIF is based.
- Disclosure requirements with respect to costs will be fully aligned with the PRIIPS regulation1.
Expectations for the new ELTIF Regime
The expectations of the revamped ELTIF Regime are generally enthusiastic, and the revisions seem to be generating a great deal of interest amongst industry participants, in particular because of the increased access to the generally underdeveloped retail market for alternative investments in the EU.
Timeline for application
The Amending Regulation was published in the EU Official Journal on 20 March 2023 will apply from 10 January 2024 with a possibility to elect to opt-in for the new regime as from 9 April 2023.
1. Regulation (EU) No. 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs)
Originally published 29 March 2023
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