ELTIF 2.0 – Citco and KPMG discuss impact of new rules

Are managers ready for new investment vehicles? Citco and KPMG discuss impact of ELTIF 2.0

7 November 2024 - With the second iteration of the European Long-Term Investment Funds (ELTIFs) rules coming into force in Europe this year, Wendy Piergolam, Senior Vice President, Business Development, Citco Fund Services (USA) Inc., sat down with Eef Verachtert, Managing Director, Citco Fund Services (Luxembourg) S.A., and Simon Denis and Paul Potocki from KPMG Luxembourg, to discuss their implications.

A key place to start is what interest are you seeing among clients for ELTIFs following this rule change. Are you getting more enquiries as a result?

SD: Retailization of private markets has indeed been a hot topic for several months now. Fundraising amongst traditional investors is challenging nowadays so fund managers are naturally turning to other channels, such as retail investors.

EV: Since the review of the regulation was announced, we have seen a significant uptake in interest from managers to launch ELTIFs. Initially we saw that demand coming from the large traditional asset management firms who offered both UCITS (Undertakings for the Collective Investment in Transferable Securities) and AIF (Alternative Investment Fund) ranges, and who were looking at the ELTIF to diversify their product offering. However, increasingly the pure play private assets and real estate investment managers are considering ELTIFs to offer their strategies in a more accessible format.

What makes ELTIF 2.0 a key differentiator for encouraging private markets investment compared to existing investment vehicles in Europe?

PP: ELTIF 2.0 provides three key advantages that make it easier for retail investors to invest in private markets.

It provides an EU marketing passport allowing fund managers to market ELTIFs across multiple jurisdictions, and the structures also benefit from a streamlined regulatory process across the EU. It also offers tax benefits as under their new structure, ELTIFs are exempt from subscription tax.

Are managers prepared for the operational impact of administering ELTIFs?

EV: Managers should not underestimate the complexities that come with combining features of liquid and illiquid fund components, and should consider the challenges both on the distribution side and on the portfolio management side.

Early engagement with an administrator is important so that connectivity with the distribution channels can be agreed and established, and managers can effectively reach their investors. With a mix of liquid and illiquid assets in the portfolio, a number of other considerations need to be taken into account, including valuation processes, NAV calculation frequencies, investor reporting, the adaption of ‘new’ concepts in alternative investment funds such as anti-dilution levies or swing pricing performance fees, and other fundamentals.

Having an administrator with the appropriate technology stack will help to address these operational pain points for fund managers.

SD: We would add that the transition towards hybrid funds supported by ELTIF 2.0 means asset servicers must adapt their operating models. These adaptations vary depending on whether an asset servicer originates from the mainstream fund world or the private assets world. It’s also a question of the use of technology, and the ability to leverage knowledge to bridge the gap between closed and open-ended funds. The new operating models chosen will depend on each organization's maturity.

Will ELTIFs help Europe catch up with the US when it comes to the “retailization” of private markets investing?

PP: The liquidity aspect is key when dealing with retail investors. On 19 July 2024, the EU Commission adopted regulatory technical standards (RTS) which provide managers with the flexibility to determine the liquidity requirements (within defined parameters). With no objection from the EU Parliament or Council, the EU Commission’s RTS has now been published in the EU’s Official Journal.

This should most likely incentivize fund managers to launch additional ELTIFs.

EV: The changes to ELTIFs establish them as a more standard vehicle for private market investments by private clients in Europe, and while Europe might not “catch up” with the US, it is expected that ELTIF volumes will now reach between $35B-$50B by 2028, so it is a step forward. With the intention of the European Union being to encourage its population to invest in the ‘real economy’, the ELTIF will hopefully contribute to this objective.

What challenges lie ahead when it comes to making ELTIFs a true success?

SD: There are still some areas to consider when it comes to the adoption of ELTIFs under the new regime. These include:

• Lock-up period - ELTIFs typically have long lock-up periods, which can deter investors who seek liquidity and flexibility.
• Distribution - ELTIFs may not be as readily available or supported on distribution platforms
• Valuation - Asset managers must adapt to the timing of the valuation. Daily NAV calculation can become a challenge.
• Withholding tax - Fund taxation is a complex process that requires a thorough understanding of tax and custody documentation from the outset.

EV: Whilst none of these concepts are new in the investment world, the combination of those features into a new product type will require education of investment professionals, distributors and investors, for the ELTIF to become a new household name.