The introduction of the European Long-Term Investment Fund (ELTIF) 2.0 in 2024 is regarded as one of the most significant regulatory changes in recent years and has the potential to be a game-changer for retail investors and the alternative investments asset class. ELTIF volumes could even reach €100 billion by 2028, a substantial increase from €11 billion in 2022.
However, one year on, the uptake of ELTIF 2.0 has perhaps been slower than expected – despite high levels of initial optimism. Market participants have continued to champion the fund’s objectives, but restrictive investment and distribution rules have stymied their growth. Tackling this requires a fundamental rethink of how fund managers engage with retail investors.
Why the slow uptake in the ELTIF market?
Retail investors’ demand for private market investments is growing rapidly as they seek to diversify beyond traditional assets like stocks and bonds. The ELTIF 2.0 framework aims to lower the barriers to entry, offering easier access to private markets with reduced minimum investment requirements.
While the appetite is there, only 16% of retail investor AUM is in private markets, despite impressive returns in this space over the past year. Restrictive investment rules could be part of the puzzle that is discouraging retail investors from engaging with this fund type. For instance, ELTIFs face strict diversification requirements, making it difficult for fund managers to achieve optimal risk-adjusted returns. Limits on individual assets or issuers’ investment sizes can further restrict strategies and potential returns. ELTIFs must also adhere to specific marketing and distribution requirements, raising the costs and complexity of launching and distributing the fund. Most importantly, despite efforts to promote ELTIFs, awareness among potential investors and distributors remains low.
These factors, combined with the inherent complexities of investing in illiquid assets, have contributed to the slow adoption of ELTIF 2.0 – despite offering access to diverse investment opportunities and long-term capital appreciation.
Tapping into the retail investor opportunity
There is a substantial opportunity for growth in the ELTIF market. ELTIF 2.0 can democratise access to alternative investments; by removing minimum investment thresholds and net worth requirements for individual investors, the pool of potential investors expands significantly. This allows a bigger crowd of people to invest in alternative assets.
ELTIF 2.0 also broadens the scope of eligible assets, including investments in green bonds, fintechs, and listed companies with a market cap of up to €1.5 billion. This diversification provides more investment opportunities and the potential for higher returns.
There’s a greater focus on long-term investment, too. ELTIFs are designed to promote investment in the real economy. By providing access to private markets, ELTIFs can help direct capital toward innovative businesses and infrastructure projects, fostering economic growth and job creation.
The regions flying the flag for ELTIFs
Certain jurisdictions have emerged as leading centres for ELTIFs due to their established fund industries, regulatory frameworks and investor bases. For example, Ireland has a well-developed and experienced fund industry with a strong track record in managing alternative investment funds. The Central Bank of Ireland regulates the Irish fund industry and has extensive experience overseeing investment funds.
In France, the fund industry is growing rapidly, particularly in alternative investments. This is supported by a large and sophisticated domestic investor base and government initiatives to promote ELTIFs. Eligibility conditions for ELTIF 2.0 have been modified to facilitate investor access to those products notably through life insurance products, the PEA (French equity savings plans) and the PEE-PER (French company savings and retirement plans).
Luxembourg is a prominent centre for cross-border funds, attracting a diverse range of international investors, making it an appealing jurisdiction for fund managers seeking a global investor base. The new Luxembourg ELTIF regime allows fund managers to continue benefitting from an attractive investment toolbox, while simultaneously broadening the investor base.
The operational side of retail investor participation
Despite the opportunities presented by ELTIF 2.0, the increasing involvement of retail investors in private markets brings operational complexities that asset managers must address. To ensure smooth onboarding and portfolio management, a re-evaluation of target operating models (TOMs) is necessary for effective retail investor participation.
Today’s retail investors, who are used to investing with just a few clicks via share dealing platforms, have high expectations for a seamless digital experience. Fund managers should overhaul the onboarding process to reduce friction and minimise unnecessary documentation – while also ensuring funds are suitable for a given investor. Expectations also extend to frequent and detailed, yet digestible, investment updates. As a result, asset managers must adapt their reporting practices to provide transparent communication that meets investors’ needs. Given the increasing demand for data, scalable data management strategies are essential to handle these requests and accommodate heightened reporting requirements.
By addressing the challenges retail investors face, fund managers can play a crucial role in democratising access to alternative investments and encouraging greater participation in long-term economic financing. Over the past year, we’ve seen how ELTIF 2.0, with its broader scope, relaxed investor eligibility criteria and focus on long-term investment, is well-positioned to facilitate this process.
Unlocking this potential requires a shift in fund design, operations and education. However, once fully embraced, ELTIF 2.0 promises to become a cornerstone of the European long-term investment landscape.
Riccardo Zorzetto is Head of Client Relationship Management at IQ-EQ in Luxembourg
