ELTIFs, which may be listed or unlisted, will be closed-ended and subject to uniform rules on investment, diversification and concentration. They are aimed at encouraging long-term investments into asset classes that are too illiquid for use in existing fund structures, such as Ucits.
These vehicles are primarily aimed at channelling capital investment into much-needed infrastructure projects – essentially shifting the funding source for these projects from the public to the private sector.
ELTIFs can invest in companies needing long-term capital for infrastructure projects spanning transport and energy to hospitals, schools and social housing.
The investments may be channelled through small- and medium-sized enterprises, real estate developments and European Venture Capital Funds.
The structure will be heavily prescribed by the regulation. For example, a standard set of rules will apply to the ELTIF investment limits and narrowly prescribed redemption entitlements. At least 70 per cent of capital must be invested in eligible assets, with a maximum of 10 per cent in any single investment. Borrowing will be restricted to 30 per cent of capital.
ELTIFs may also invest indirectly through other funds, although the investments in target funds is limited to 10 per cent and an ELTIF may only acquire 25 per cent of the shares of any portfolio.
While these vehicles will be structured as alternative investment funds under the EU Alternative Investment Fund Managers Directive, they can be marketed to both professional and retail investors in the EU.
ELTIFs may well appeal to smaller pension schemes – which ordinarily cannot engage in such projects given the large scale of commitments – as well as to investors with corporate social investment goals that may be attracted to the social infrastructure focus of the vehicles.
In its approval of the regulation, the European Parliament was keen to demonstrate that this product was capable of attracting retail investors, with last-minute protections added that were now enshrined in the directive. These include the potential for an ELTIF to offer early, clearly defined redemption rights, otherwise it will generally not redeem units or shares before the end of its life cycle.
The scope to attract direct retail investment is heavily restricted by a minimum threshold, suitability requirements and other protections. A retail investor with a portfolio of up to €500,000 (£357,950) must not invest an aggregate amount exceeding 10 per cent of their portfolio in ELTIFs, subject to the initial minimum amount invested in one or more ELTIFs being not less than €10,000.
From a UK perspective, the primary issue in successfully bringing ELTIFs to market is that there is no obvious structure for it to adopt.
A limited partnership would most likely be classed as a collective investment scheme and subject to significant restrictions on marketing to retail investors, while a corporate body, such as a listed investment trust, would most likely fail to provide a tax-efficient structure.
Both HM Treasury and the FCA may consult on legislative and regulatory amendments, the outcome of which may be dependent on industry engagement and support for ELTIFs.
For now it seems unclear whether ELTIFs will be an attractive proposition for investors looking for long-term investment returns generated by certain alternative sectors.
Melville Rodrigues and Karagh Gilliatt are partners at law firm CMS
ELTIFs: Key points
• The ELTIF regulation was approved by the EU Council on April 20, and will come into force 20 days after publication in the Official Journal of the EU.
• Prior to marketing to retail investors, an ELTIF manager will need to apply a specific internal process to assess whether the ELTIF is suitable for marketing to retail investors.
• The ELTIF manager or distributor will need to undertake suitability tests for retail investors and to provide the investors with “appropriate investment advice”.
• However, retail investments in ELTIFs do not need to be direct. In order to broaden retail access, the European Parliament has clarified that Ucits will be able to invest in certain ELTIFs that otherwise satisfy the Ucits IV eligibility requirements.
• In addition, there may well be other indirect investment opportunities – for example, through life funds.
