ELTIF 2.0 – Can it unlock access to Private Markets?

21 May 2024 - European Long-Term Investment Funds (ELTIFs) were recently revamped by new rules - known as ELTIF 2.0 - in an attempt to open up new opportunities for managers to provide both professional and retail investors with access to private markets.

Originally introduced in 2015 to enhance long term investment into the real economy, ELTIFs are the only alternative investment funds that can be distributed across borders in the EU to both types of investors. However, whilst being able to take advantage of an EU passport for the marketing of alternative investment funds, the ELTIF did not scale-up as expected as it was considered too restrictive and not fit for purpose.

ELTIF 2.0, which came into effect from 10 January 2024, has been created to remedy the shortcomings of its predecessor, reemerging with more relaxed marketing rules for investors, together with more flexible investment rules for managers. But will they finally thrive?

What are ELTIF 2.0’s key enhancements?

Wider range of eligible assets

One of the most significant changes under ELTIF 2.0 is that it broadens the scope of eligible assets, both by incorporating new categories and by enlarging existing ones. Managers can now invest in green bonds and fintechs, and the market cap for eligible listed companies has been raised from €500m to €1.5bn. Other positive developments include:

1. clarity around the ability of an ELTIF to invest in global investments, as opposed to being limited to European assets;
2. A wider range of eligible “real assets” are now in scope.

Structuring Possibilities

The eligibility of fund of funds strategies has been widened so an ELTIF can now invest in UCITS and EU Alternative Investment Funds. Previously, this was limited to other ELTIFs. In addition, ELTIFs can now be established as master-feeder structures, provided that both the master fund and the feeder fund are ELTIFs.

Removing barriers for retail investor access

The potential to democratize private asset ownership is another key enhancement of ELTIF 2.0. To this end, the revised framework:

1. eradicates the cumbersome, two-pronged assessment of suitability for retail investors (a minimum of €10,000 investment, but no more than 10% of a retail investor’s financial instrument portfolio in ELTIFs);
2. and the burdensome nature of the original ELTIF-specific suitability assessment has been scaled down by aligning it with the suitability requirements in MiFID II (Markets in Financial Instruments Directive 2014).

More flexible diversification and leverage rules

Amended thresholds in portfolio diversification and the relaxation of leverage rules are other welcome changes introduced by ELTIF 2.0. The key points include:

1. the reduction of the diversification in eligible investment assets from 70% to 55%;
2. and leverage ratios have been increased from 30% up to 50% of NAVs for ELTIFs marketed to retail investors, and to 100% where the ELTIF is marketed solely to professional investors.

Liquidity

ELTIF 2.0 introduces the availability of semi-liquid vehicles which offer liquidity at periodic intervals, subject to certain restrictions. The precise rules regarding redemption policies and liquidity facilities are in the process of being finalized by a set of Regulatory Technical Standards (RTS), drafted by the European Securities and Markets Authority (ESMA)

On 22 April 2024, in a welcome step forward in doing just that, ESMA provided its response to the European Commission’s (EC) suggested amendments to the RTS, and confirmed that it agreed with the majority of the EC’s changes. The EC will now either adopt the changes proposed by ESMA and then seek the views of the European Parliament and European Council on these, or reject them. No final date has been given for this but the expectation is that the final RTS could be published as early as autumn 2024.

Conclusion

Some further ironing out of the regulatory parameters regarding redemption and liquidity provisions is required through ESMA’s RTS, but it is widely anticipated that ELTIF 2.0 will play a pivotal role in connecting non-institutional capital with private markets strategies.

Whether ELTIF 2.0 truly unlocks private markets for retail investors will only become clear over time, but the new product certainly offers a number of benefits over its predecessor, giving high net worth and retail investors an easier route into private markets.