ELTIF 2.0: European Retail Alternative Investment Funds

In the Slovak legal environment, among alternative investment funds intended for retail (i.e. non-professional) clients, the most popular are the public special real estate fund and the public special securities fund. However, these types of funds have a strictly defined investment policy that severely limits creativity and diversity in the composition of their portfolio. An alternative for retail clients in terms of greater portfolio variability may be special qualified investor funds, where the minimum investment is EUR 50,000, or a European venture capital fund (EuVECA), which we were the first in Central Europe to establish in 2021 and which is more commercially acceptable in terms of regulation and administration than a qualified investor fund. The uniqueness of European Long Term Investment Funds (ELTIFs), whose legislation underwent a fundamental change in March 2023, is that they can be distributed to retail investors across the EU, will not impose a minimum investment threshold and will allow them to combine investments such as real estate, green bonds or even more non-traditional assets such as intellectual property, aircraft or vessels within their portfolio.

On 15.3.2023, the European Parliament approved Regulation No. 2023/606[1] (“ELTIF Regulation 2.0“), which constitutes a major modification of Regulation No. 2015/760[2] (“ELTIF Regulation“) establishing the legal framework for the so-called “ELTIFs”. European Long-Term Investment Funds (“ELTIFs“). As of the date of this article, only 90 ELTIFs[3] with a home Member State in Luxembourg, France, Italy or Spain are registered with the European Securities and Markets Authority (“ESMA“). At the same time, according to the register, none of these investment funds is distributed on the territory of Slovakia (e.g. in the Czech Republic there are 6 ELTIF funds distributed according to the register). It is precisely as a result of the relative failure of the ELTIF segment that the ELTIF 2.0 Regulation was adopted , the purpose of which is, in particular, to make these alternative investment funds more attractive, including by broadening their investment policy and removing the limits to entry for retail investors.

General characteristics of ELTIFs and their distribution

The purpose of the legislation establishing ELTIFs was to provide financing for the ‘real’ economy of the Union, namely for various infrastructure projects, for unlisted companies or listed small and medium-sized enterprises (SMEs) issuing equity or debt instruments for which there is no readily identifiable buyer[4]. ELTIFs were conceived by the ELTIF Regulation as closed-end funds with less liquid assets for long-term investment (over the life-cycle of the respective ELTIF).

Only alternative investment funds authorised in accordance with the ELTIF Regulation may use the ELTIF designation. They may apply for a permit only the so-called. licensed alternative investment fund managers[5], so the creation and management of ELTIFs is not as widely accessible as for other European investment funds, EuVECA or EuSEF. The competent authority for granting the authorisation is the National Bank of Slovakia, which must decide within two months from the date of submission of a complete application for authorisation.

ELTIFs can be distributed within the EU. Under the ELTIF Regulation, an ELTIF manager may market the units or shares of an ELTIF it manages to both professional and retail investors in other Member States, subject to notification to the regulator in its home Member State. While the AIFMD[6] regulates the European passport only for the distribution of alternative investment funds to professional investors, in the case of ELTIFs this regime is extended to retail investors.

Investment policy

An ELTIF may only invest in (i) the so-called. eligible investment assets or (ii) the assets eligible for investment for UCITS[7] within the meaning of Article 50 of Directive No. 2009/65/EU[8].

Under the ELTIF 2.0 Regulation , eligible investment assets are primarily the following asset categories:

1. equity instruments (e.g. shares) or quasi-equity instruments issued by so-called qualified portfolio undertakings (“KPPs“), and KPPs are (with certain exceptions): (i) undertakings that are not financial undertakings, (ii) unlisted companies or listed companies with a market capitalisation of EUR 1.5 billion or less; or (iii) businesses established in the EU or certain third countries.
2. debt instruments issued by KPPs;
3. loans granted by ELTIFs to KPPs whose maturity does not exceed the life of the ELTIF;
4. under specified conditions, units or shares of one or more other ELTIFs, EuVECAs, EuSEFs, UCITS and EU AIFs managed by EU AIFMs;
5. so-called “real assets“, which the ELTIF 2.0 Regulation defines as “an asset that has intrinsic value by virtue of its nature and characteristics”. In terms of the recitals of this regulation, these will be assets comprising immovable property such as communications, environmental, energy or transport infrastructure, social infrastructure including nursing homes or hospitals, as well as infrastructure for educational, health and social support facilities or industrial facilities, and other assets including intellectual property, vessels, equipment, machinery, aircraft or rail vehicles. Eligible investments in real assets should also include investments in water rights, forests, construction and minerals;
6. green bonds issued by KPP

(“Eligible Investment Assets“).

The ELTIF 2.0 Recitals also specify what is not to be considered Eligible Investment Assets, namely works of art, manuscripts, wine stocks, jewelry, or other assets that do not themselves constitute long-term investments in the real economy.

Currently, an ELTIF must invest at least 70% of its capital in Eligible Investment Assets, but the ELTIF 2.0 Regulation has reduced this limit to only 55%. Taking into account the very broad definition of Eligible Investment Assets, the investment limit thus set creates a relatively wide latitude in the implementation of the investment policy.

Retail investors

The current legal situation requires that when ELTIF units or shares are distributed to retail investors, inter alia (i) provided appropriate investment advice; and (ii) where the value of a potential retail investor’s portfolio of financial instruments does not exceed EUR 500 000, the ELTIF manager must ensure that the potential retail investor does not invest in ELTIFs an aggregate amount exceeding 10% of the value of its portfolio of financial instruments and that the initial minimum investment in one or more ELTIFs is at least EUR 10 000.

The ELTIF 2.0 Regulation simplifies these conditions considerably, by removing both the minimum investment limit of €10,000 and the requirement of 10% of the value of a retail investor’s portfolio of financial instruments. ELTIF units or shares will only be able to be distributed to a retail investor if a suitability assessment has been carried out in accordance with MiFID II[9]. A retail investor will be able to make an investment even if the ELTIF is not considered suitable for them on the basis of the suitability assessment carried out, in which case they will have to explicitly agree that they understand the risks of investing in the ELTIF.

Lifetime of the ELTIF investment

As mentioned above, ELTIFs are primarily designed as closed-end investment funds. That is to say, investors are not allowed to request the redemption of their units or shares before the end of the life of the ELTIF, which is a specific date set out in the ELTIF’s statutes or constitutive documents.

At the same time, however, the legislation allows an ELTIF to admit in its statutes or constituent documents the possibility of redemption even before the end of the ELTIF’s lifetime, subject to fixed conditions reflecting in particular the management of the investment fund’s liquidity risk.

Entry into force and application of the ELTIF Regulation 2.0

The ELTIF 2.0 Regulation entered into force on 9.4.2023. It will apply in the European Union from 10.1.2024.

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Sources

[1] Regulation No. 2023/606 amending Regulation (EU) 2015/760 as regards requirements relating to the investment policies and operating conditions of European long-term investment funds and the range of eligible investment assets, portfolio composition and diversification requirements and cash borrowing and other fund rules

[2] Regulation (EU) 2015/760 of the European Parliament and of the Council of 29. April 2015 on European long-term investment funds

[3] The register is available here: https:%2Flibrary%

[4] Recital 1 of the ELTIF Regulation

[5] Managers authorised under the AIFMD or the AIFMD Directive, respectively. according to § 28a of the Collective Investment Act

[6] Directive 2011/61/EU of the European Parliament and of the Council of 8. June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulation (EC) No. 1060/2009 and (EU) No. 1095/2010

[7] Undertakings for collective investment in transferable securities or so-called “undertakings for collective investment in transferable securities”. UCITS funds;

[8] Directive 2009/65/EC of the European Parliament and of the Council of 13. July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)

[9] Directive 2014/65/EU of the European Parliament and of the Council of 15. on markets in financial instruments amending Directive 2002/92/EC and Directive 2011/61/EU