Reshaping the ELTIF Regulation
Following the adoption of Regulation (EU) 2015/760 (ELTIF Regulation) on European long-term investment funds in 2015, only a few ELTIFs were authorised, mainly due to regulatory constraints relating to ELTIF eligible assets, the portfolio composition and the distribution to retail investors.
On 20 March 2023, the revised ELTIF Regulation was published in the Official Journal of the European Union.
Yves Elvinger explains that “It is expected that the revised ELTIF Regulation will significantly enhance the structuring possibilities and therefore contribute to the growth of ELTIFs.” ()
The scope of ELTIF eligible assets will be broadened, including increased market capitalisation for listed companies (up to EUR 1.5 billion), FinTech companies, simple, transparent and standardised securitisations and green bonds. Fund-of-funds strategies and master-feeder structures will also be possible under the revised ELTIF Regulation. Moreover, the revised definition of real assets will significantly increase the type of real assets in which an ELTIF can invest.
It is expected that the revised ELTIF Regulation will significantly enhance the structuring possibilities and therefore contribute to the growth of ELTIFs.
Portfolio composition and diversification rules will become more flexible and will enable ELTIF managers to manage ELTIFs more in line with the market of the relevant asset classes and the type of investors to which ELTIFs are marketed. The revised ELTIF Regulation will distinguish between ELTIFs marketed to retail investors and ELTIFs solely marketed to professional investors. The latter will benefit from a lighter regime with less stringent rules.
While it is already accepted in Luxembourg that an ELTIF can invest the majority of its assets in investments located in third countries, the revised ELTIF Regulation expressly recognises this possibility.
The new rules also specifically recognise that investments by ELTIFs can be conducted through the participation of intermediary entities, including special purpose vehicles and securitisation or aggregator vehicles or holding companies and provide for the possibility of minority co-investment in investment opportunities.
An improved marketing regime for ELTIFs offered to retail investors
Lisa Schon explains that “The revised ELTIF Regulation seeks to remove barriers managers may encounter when marketing ELTIFs to retail investors.” ()
Under the amended rules, retail investors will have wider access to ELTIFs while preserving investor protection rules. The minimum investment amount for ELTIFs that are offered to retail investors will be removed and the distribution rules will be aligned with the suitability test requirements under the MiFID II. In cases where the result of the suitability assessment is that an ELTIF is not suitable for a retail investor, such investor can give express consent to proceed with the transactions.
The revised ELTIF Regulation seeks to remove barriers managers may encounter when marketing ELTIFs to retail investors .
Distributors and managers of ELTIFs will no longer be required to provide retail investors with investment advice. Consequently, AIFMs intending to market ELTIFs directly to retail investors will no longer be required to be authorised to provide discretionary management services under the so-called MiFID II extension licence. The requirement for managers to set up local facilities in each member state where they intend to market the ELTIF to retail investors will also be removed.
Luxembourg as domicile for ELTIFs
Luxembourg is a leading jurisdiction for investment funds and their cross-border distribution, with a legal framework, which combines flexibility and legal certainty. The legal framework in Luxembourg offers a range of regulated and non-regulated alternative investment fund structures, which are suitable for the structuring of ELTIFs that can be offered to retail investors as well as to professional investors.
Since the adoption of the initial ELTIF Regulation, Luxembourg has played an active role in the structuring of ELTIFs in collaboration with the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). Today more than half of authorised ELTIFs are domiciled in Luxembourg with a significant growth potential once the revised ELTIF Regulation enters into force.
The new ELTIF regime will enter into force on 9 April 2023 and will apply from 10 January 2024.
It is likely that the draft regulatory technical standards (RTS) will be published for public consultation in the coming weeks. These RTS will bring further clarification on the provisions relating to the redemption of units or shares of ELTIFs.
ELTIFs authorised before 10 January 2024 may choose to be subject to the new regime as long as they notify their national competent authority. In Luxembourg, ELTIFs can therefore be authorised under the new ELTIF regime from the entry into force of the revised ELTIF Regulation as of 9 April 2023. Many asset managers are already preparing to launch new ELTIFs under the new rules.