Eltifs unlock private market growth for retail investors with simplified structures and increased accessibility, writes Lisa Lynn König, head of Clearstream Fund Services Strategy.
In 2022, the global private market experienced relative turmoil due to the deteriorating macroeconomic environment, primarily linked to inflation and the subsequent global interest rate hike. Directly related to this macroeconomic environment, traditional or “liquid” fund markets faced noticeable instability and fluctuations, previously only witnessed over a decade earlier during the 2008 financial crisis.
However, private market strategies have demonstrated better than average resilience to these market pressures, protecting investors exposed to these asset classes. Even though the relative performance of the asset class in terms of valuation and capital raised has decreased compared to 2021, private market investment strategies have continued to outperform their public market equivalents – a two-decade-long trend.
Within private markets, the ELTIF (European Long Term Investment Funds) market has grown by more than 50% year-on-year to reach more than € 11 billion in 2022, with €4bn of net new flows. The opportunity for growth in ELTIF markets will continue following the European Parliament’s announcement of a new regulation for ELTIF 2.0. This new regulation facilitates exposure to alternative long-term investments for retail investors. This decision should facilitate further investment, with a lower minimum investment threshold and simplified portfolio composition and diversification requirements, effectively making ELTIFs much more attractive to retail investors.
Global Asset Managers are already working on a simplified fund structure to render ELTIFs more attractive and accessible to the retail market. Removing capital calls and drawdowns in some products are two such methods. According to Justina Deveikyte, director of Cerulli’s European institutional asset management research, half of German private banks and around 40% of Swiss and UK private banks and wealth managers plan to increase their allocations to private equity growth strategies over the next 12 to 24 months.
Private market investment strategies can offer higher investment returns, more diversification and protection against volatility compared to the public sector. However, private funds have been criticised for their inherent illiquidity, complexity, and high investment barriers (due to their close-end nature).
Opening the European market for private markets via ELTIFs to retail investors will also bring a wealth of opportunities for investors, distributors and asset managers. It should provide welcome efficiencies for intermediaries, fund administrators and transfer agents.
“…private market investment strategies have continued to outperform their public market equivalents – a two-decade-long trend”
Retail investors are looking for better returns. For investors, ELTIFs, with their lower minimum investment thresholds, provide broader access to long-term investments into companies and projects that are not accessible through public markets, thereby complementing their existing investment strategy. Centralised access via existing channels will be vital to achieving efficiency across the market for these new products.
Distributors, meanwhile, are looking for unique ways to differentiate these products for investors. For distributors, ELTIFs are a way to integrate private market offerings into their existing customer portfolios. The integration will enhance their marketability, allow risk and return diversification and follow the trend of liquid and illiquid allocations, making them more attractive.
Asset managers are looking for alternative sources of growth, primarily where institutional investors have already achieved maximum allocation in alternative funds. For traditional and alternative asset managers, designing tailored ELTIFs will attract a broader base of distributors and underlying retail customers.
For intermediaries, fund administrators and transfer agents, key considerations are streamlined operations, reporting and the inherent and increasing need for transparency expected from targeting retail investors.
Indeed, the continued success of private markets (over $2.3 trillion in AuM) has led to increased compliance and reporting requirements – and therefore cost – for the fund management industry via the Alternative Investment Fund Managers Directive (AIFMD), which regulates the European private market industry. Recent proposals for AIFMD II are likely to reinforce these requirements further and, consequently, the underlying cost. Nonetheless, the post-trade industry is well-placed to support all market participants to remove barriers to distributing and accessing private market strategies.
By collaborating with fund administrators and private market platforms, the post-trade sector can establish operational efficiencies that facilitate access to manager strategies in a highly competitive manner while also empowering all market participants to maximise the value potential offered by the new regulatory framework.
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