The Background 

On 15th February 2023, the European Parliament voted in favour of the much anticipated update to the ELTIF regulation (European Long-term Investment Funds), with the Council of the EU following suit on 7th March. First passed in 2015, its aim was to increase accessibility to long-term assets such as infrastructure and unlisted companies by broadening the marketing audience across the EU, under a marketing passport, to include retail investors. Despite being favourably received by the industry in principle, it failed to achieve widespread adoption. As of January 2023, the ESMA ELTIF register refers to only 84 ELTIFs, compared to the RAIF regulation (Reserved Alternative Investment Fund) set up in 2016 which has seen far greater popularity. These reforms have been long-awaited to boost uptake of this fund structure and help drive the democratisation of private assets.

The Update, by Dr Stefan Staedter, Partner at Arendt & Medernach SA 

For the investment universe, the ELTIF 2.0 will:

• Broaden the investment universe: in addition to private equity, private credit, real assets and ELTIF, EuVECA and EuSEFs, it will be also possible to invest in: (i) EU AIFs managed by EU AIFMs and invested in ELTIF-eligible assets, (ii) simple, transparent and standardised securitisations and (iii) green bonds issued in accordance with the proposed Regulation on Green Bonds currently being prepared by the EU policymakers. 
• Simplify the definition of ‘real assets’ and remove the minimum threshold for real estate strategies.
• Broaden the scope of qualifying portfolio undertakings: (i) the maximum market capitalisation threshold in case of investments in listed companies will be raised to EUR 1,500,000,000.- and (ii) the EU list of non-cooperative jurisdictions for tax purposes rather than art. 26 of the OECD Model Tax Convention on Income and on Capital will be the new benchmark for investments in third countries. 
• Clarify the possibility to make indirect investments and to invest on a co-investment basis provided that the ELTIF will put in place the organisational and administrative arrangements in order to identify, prevent, manage and monitor potential conflicts of interest.
• Grant more flexibility re. (i) the portfolio composition (minimum 55% instead of 70% of the capital to be invested in illiquid assets), (ii) the risk diversification (20% instead of 10% as new reference for illiquid assets) and (iii) the borrowing provisions (50% of the NAV as maximum rather than 30% of the capital, no limitation for guarantees to be provided and more flexibility when it comes to foreign currencies and the borrowing purpose).
• Clarify the redemption framework and introduces a matching mechanism which will be ultimately more finetuned by level II measures to be proposed by ESMA. Liquid ELTIFs shall help to make ELTIFs more attractive for retail investors. 

On the distribution side:

ELTIF 2.0 will align the ELTIF suitability test with the MiFID II suitability test. The suitability test will need to be carried out irrespective if the shares/units are acquired by a distributor as an initial subscription or via a secondary market. In case the distributor considers the ELTIF not to be suitable for the retail investor, the retail investor’s consent may grant an equivalent access to the ELTIF.

It will likewise remove the minimum investment of EUR 10,000.- and the 10% exposure cap for retail investors whose financial portfolios are below EUR 500,000.-. Both amendments are very welcome by the distributors as they have been true barriers for the democratisation of private assets. 

Finally, ELTIF 2.0 will simplify the access to an ELTIF for senior staff, a member of the portfolio manager, director, officer or an agent or employee of the AIFM or an affiliate of the AIFM of the ELTIF. To the extent that these persons have sufficient knowledge about the ELTIF, they do not need to be subject to a suitability test in order to be allowed to invest in the ELTIF.

The Results

As a result of this update, the below benefits can be expected:

• Lighter requirements for retail investors will allow more individual investors to gain access to private assets. This will, in turn, support managers looking to diversify their investor base.
• Alignment with the MiFID II requirements for product governance and the suitability test will streamline the relationship between AIFMs and distributors in the ELTIF domain.

Some remaining challenges include:

• Higher volumes of investors demanding access to private markets will put pressure on managers to re-evaluate their operating model and service providers to ensure demand can be met.
• By opening up access to retail investors, many may opt to invest via a nominee, requiring managers to include the ability to support additional nominee reporting capabilities for their distributors.

The Goji point of view

Goji has seen wider interest in the ELTIF 2.0 as the scope of eligible assets and investments has increased. The product is now more attractive and flexible, not only for retail investors, but also for professional investors. Goji is already supporting asset managers in the distribution of their ELTIF products to EU private banks, and expects to see continued growth for the ELTIF 2.0 in the coming months. 

Want to learn more? Get in touch to discuss how Goji can support you launching an ELTIF 2.0.