In recent years, the global asset management industry has undergone a significant transformation. As traditional public markets get increasingly bogged down with macroeconomic volatility and compressed yields, asset managers and institutional investors alike are increasingly putting a primer on alternative investments and private markets.
Assets under management (AuM) in global private markets have grown significantly over the last six years, jumping from USD 9.2tn in 2018 to USD 14.1tn in 2023, withstanding the geopolitical and macroeconomic headwinds of 2022. Regardless of the asset class, investments in private markets are now an essential component of any portfolio.
European policymakers and regulators have sought to capitalise on this trend and channel these investment flows to drive economic growth, achieve sustainable development goals, and offer diversification opportunities for investors, institutional and retail alike. In this context, the EU’s European Long-Term Investment Fund (ELTIF) and the UK’s Long-Term Asset Fund (LTAF) emerged, representing significant regulatory efforts to drive socioeconomic development by channelling investments flows towards long-term illiquid assets.
Both fund structures have elicited significant enthusiasm in the asset management industry, but will they truly manage to usher in a transformation of the industry?
ELTIF: a promising horizon despite initial roadblocks
Initially launched in 2015, ELTIF seeks to facilitate and foster long-term investments in the EU’s ‘real’ economy by directing private savings into infrastructure (transportation, sustainable energy generation and distribution, social housing and medical facilities etc.) and unlisted small and medium enterprises.
Despite its promise, ELTIF initially failed to gain traction due the narrow definition of qualifying assets, the limited investment universe, liquidity-related concerns and high minimum thresholds for eligible investors, to name a few barriers.
European policymakers and lawmakers recognised these shortcomings, and a significant overhaul of the regulation – dubbed ‘ELTIF 2.0’ – was formally published in the Official Journal of the European Union in March 2023, coming into force in January this year. ELTIF 2.0 brings significant simplifications and enhancements, including the reduction of the mandatory investment in eligible assets from 70% to 55%, allowing for more flexibility in asset allocation. Funds of funds are now permissible, expanding investment options to include other alternative investment funds (AIFs), while the allowable debt ratio is raised from 30% to 50%, enabling greater leveraging.
Distribution has also been streamlined by removing the EUR 10,000 minimum investment requirement and the 10% upper limit on assets that do not exceed EUR 500,000. The separate suitability test is no longer mandatory, simplifying the process for providers and investors.
These changes have made ELTIFs more attractive and accessible – the number of ELTIFs jumped from 77 in 2022 to 95 in 2023, while their AuM grew from EUR 10.9bn to EUR 13.6 in the same years.
LTAF: the UK responds
In November 2021, the LTAF regime was a response to industry demands to facilitate and promote long-term investments. Recently many institutional investors in the UK had eschewed investing in long-term assets due to barriers such as the absence of an authorised open-ended fund structure to enable long-term investments in illiquid assets while maintaining appropriate investor safeguards. LTAF “addresses the market failure that [defined contribution] default pension schemes do not invest in long-term, illiquid assets,” despite having the investment horizon to do so”, as per the Financial Conduct Authority (FCA)’s policy statement.
While both ELTIF 2.0 and LTAF share common objectives of promoting long-term investments in illiquid assets and the ‘real’ economy, they cater to different markets with tailored regulatory frameworks. Indeed, ELTIF 2.0’s pan-European scope contrasts with LTAF’s UK-centric approach.In addition, ELTIFs have a broader distribution focus and are close-ended funds by default, while LTAFs are open-ended funds primarily focused on professional investors, high-net-worth individuals (HNWIs) and, most notably, the UK’s fragmented pensions system.
The first LTAF – launched by Schroders – was authorised by the FCA in March 2023, with a “focus on providing defined contribution and other eligible investors with the opportunity to access” private markets. Since then, a handful of other LTAFs have received FCA approval, although the number remains significantly less than ELTIFs.
Reshaping Europe’s asset management industry?
So, is the hype warranted? It is still too early to tell. ELTIFs and LTAFs currently make up only a fraction of private markets but the opportunity is there. Retail investors across Europe have increasingly been seeking alternative investments to diversify their portfolios, while British pension funds, with their long-term investment horizons, have long sought the kind of illiquid long-term investment opportunities provided by LTAF.
Moreover, there is a significant and growing amount of dry powder in European private markets ready to be invested, having jumped from USD 511.6bn in 2018 to USD 751.2bn last year.
Ultimately, while the jury is still out on whether the hype surrounding ELTIF 2.0 and LTAF is warranted, there is no denying that both fund structures are poised to have a substantial impact on the European asset management industry by democratising access to long-term, illiquid private market investments, fostering economic growth, promoting sustainability, and enhancing investor protections.
As both fund structures gain traction, they could contribute to reshaping the European asset management industry whereby private markets come to occupy an increasingly preponderant role, helping to align capital flows with the EU’s and the UK’s long-term socioeconomic and developmental objectives. This is just what is needed to usher in a much-needed economic revival in Europe.
The authors are René Paulussen, Partner and Alternatives Leader, PwC Luxembourg, and Thierry Braem, Partner and Alternatives Tax Leader, PwC Luxembourg
