The industry is adapting to cater for this. In tandem, regulators are actively engaging with this trend to ensure investor protection in a market historically considered to be inappropriate for the retail base – one characterised by elevated costs, substantial risk exposure and extended lock-up periods.
Certain institutional entities have recently been limiting the volume of capital usually earmarked for making commitments in alternative investment funds.
In this shift towards greater inclusivity in a traditionally exclusive space, where does the appetite to participate in this revolution stem from, and why is it shared by both asset managers and investors alike?
Certain institutional entities have recently been limiting the volume of capital usually earmarked for making commitments in alternative investment funds. Whilst some of these decisions are strategic, in many cases these players are simply no longer regarded as having sufficient resources to provide all the required funding alone.
Consequently, asset managers seeking capital for new ventures are having to shift their sights away from the more conventional participants of their funds, and instead explore other avenues to secure the fundraising required.
As Albert Einstein put it: “In the midst of every crisis, lies great opportunity.”
Enter the private investors.
Non-professional investors – well aware of the robust yields associated with alternative investments – are capitalising on these conditions, diversifying their portfolios across both private and public assets to optimise their investment returns. Separately, in changing their usual stance vis-à-vis the retail domain, asset managers are exhibiting a proactive response to addressing the funding gap.
This is all being done in alignment with the regulators who have been collaborating with a vocal industry to produce an apt investment fund structure for the retail base. And ELTIF 2.0 is the latest attempt at achieving this.
ELTIF 2.0 refers to the long-awaited reform of the ELTIF regulation, the regime created in 2015 with the objective of launching an alternative investment fund vehicle with two distinctive features: (i) its ability to be marketed to retail investors across the European Union via a marketing passport, and (ii) the possibility for it to be used to carry out loan origination activity across the European Union.
Despite this, the original ELTIF regime did not enjoy the level of success expected of it; this is due to the industry’s perception that (i) it lacked pragmaticism and feasibility with respect to eligible assets, (ii) its diversification and concentration requirements were too stringent and (iii) it was imposing barriers to marketing to retail investors.
ELTIF 2.0, with its renewed and more favourable features, may well be the solution to opening the alternatives market more widely and unlocking much-needed capital from private investors.
On 15 February 2023, after much deliberation between regulators and industry, the European Parliament adopted ELTIF 2.0. Whilst the revised version does not fulfil all its promises, considerable improvements have been made and ELTIF 2.0 has garnered positive reception from industry stakeholders. Indeed, by providing clarifications and removing some of the previous obstacles present in the original ELTIF iteration, AIMA expects the updated framework to result in an additional EUR 100 bn in alternative assets funding over the coming five years.
ELTIF 2.0, with its renewed and more favourable features, may well be the solution to opening the alternatives market more widely and unlocking much-needed capital from private investors. However, ELTIF managers and administrators will still need to grapple with a series of operational challenges in order to reap the benefits of this new regime. Broadly speaking, these could be grouped into the following four categories: (i) valuation, (ii) investor servicing, (iii) depositary functions and (iv) access to retail investors:
· Valuation: although classified as a closed-ended structure, in order to accommodate retail investors these ELTIFs will need to be traded often and so will require solid procedures allowing for frequent valuations;
· Service providers’ systems: Traditional alternative investment funds have few (albeit large-ticket) investors; transfer agents of these funds therefore use systems designed for fewer transfers. ELTIF managers will need to ensure that they work with transfer agents with the infrastructure required to facilitate larger volumes of investors, transactions, and requests;
· Depositary: similar to the transfer agents required, ELTIF managers will need to ensure they select depositaries that are capable of servicing retail-style funds;
· Distribution: Put simply, alternative investment fund managers are not used to accessing the retail base; ELTIF managers will therefore need to perhaps tap into a network of distributors, or find ways to access retail investors directly (e.g. tokenisation);
· Structuring: many asset managers want to mix respective pools of institutional and retail investors for investing into the same alternative assets – it has proven challenging from a structuring perspective.
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Authors
, Principal – Head of Investment Funds Practice, PwC Legal SARL
, Partner – Alternatives Investments Tax Leader, PwC Luxembourg, Société coopérative