Stuart Corrigall of trade body Efama says recent changes to the Eltif rules will make this form of illiquid-asset fund attractive to asset managers and institutional investors.
In February this year, the EU Parliament cleared the final hurdle for a new and much-improved regulation on European long-term investment funds (Eltifs). When first introduced, asset managers were keen to offer Eltifs, but in reality, various challenges with the practical application of the regime led to limited success. The European Commission received plenty of input from industry representatives during the review process and thankfully has addressed most concerns.
Eligible assets and investment and borrowing restrictions were widely perceived as unnecessarily restrictive, which in turn limited managers’ ability to design Eltif products that would provide the returns that investors expect. The redesigned regime benefits from a broader scope of eligible assets and qualifying portfolios, which promotes portfolio diversification and strengthens the liquidity profile. Removing the minimum initial investment and the 10% exposure threshold, as well as full integration with MiFID suitability assessment, means that retail investors will have greater access to Eltifs with increased protection.
Retail versus professional investors
Managers and distributors also had to contend with numerous monitoring and local substance obligations to accommodate retail investors. On the other hand, institutional investors were not sure why they should use Eltif when they were already familiar with existing alternative investment options. The new regime makes a clear division between Eltifs marketed to retail versus professional investors, which will greatly help both asset managers and investors. This includes the option for partially open-ended Eltifs is subject to liquidity management requirements. There will also be more of a harmonised distribution regime for retail investors in the industry.
The revised regime is expected to be published in the Official Journal of the EU in March 2023 (making it law) and applicable from Q1 2024. Existing Eltifs will remain compliant for five years after this date but can choose to take advantage of the benefits of the new regime earlier if they wish. Under the original regulation, we only saw around 20 Eltifs registered. Now, even before the new regime is in place, there are over 80 Eltifs and many more in the pipeline. Whilst for some, there is still room for further refinement, such as the ability to offer a truly open-ended Eltif, these reforms will undoubtedly make the Eltif more attractive to asset managers and investors alike.
*Stuart Corrigall is chair of the European Fund and Asset Management Association fund regulation standing committee.
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