On April 8, 2023, Regulation (EU) 2023/606 of the European Parliament and of the Council of March 15, 2023 (ELTIF Reform) amending Regulation (EU) 2015/760 (ELTIF Regulation) came into effect. The reform of the ELTIF Regulation mainly aims to increasing the attractiveness and acceptance of European long-term investment funds (“ELTIF”), thus enhancing the European financial markets’ stability and efficiency.
Reform of the ELTIF Regulation
The ELTIF Regulation, which has been in effect in all European member states since December 9, 2015, governs the authorization, investment policy and conditions for the activities of alternative investment funds (AIF) domiciled in the European Union. It pursues the European goal of raising and channeling capital towards long-term investments in European economy by means of intelligent, sustainable and inclusive growth.
However, the acceptance of the capital market hoped for by the European legislator has so far failed to materialize: Since the introduction of the ELTIF Regulation, only about 77 ELTIFs (as of December 31, 2022) have been registered in the EU in the last seven years. This is due to the high obstacles for an investment by retail investors as well as the restrictions in the launch and distribution process.
Now, the reform of the ELTIF Regulation aims to eliminate existing barriers and to increase the ELTIF regime’s attractiveness and acceptance. To that end, the reform comprises numerous changes in relation to the eligible assets’ scope, access for retail investors and the marketing of ELTIFs. This is supposed to allow ELTIF managers a more flexible structuring and better implementation of their investment strategies.
Significant changes for ELTIF managers
The term of “eligible assets” has been further specified and, at the same time, extended. While, in particular, an investment into real assets no longer requires a specific social or economic benefit, an ELTIF can invest into tangible assets in future to the extent these have intrinsic value due to their substance and characteristics. A wider range of possible investments for ELTIFs also results from the removal of the minimum requirement according to which a single tangible asset had to be worth at least EUR 10 million.
In connection with the portfolio structure, the quota to be invested in eligible asset classes was deemed to be too high and was corrected from 70 percent to 55 percent. Furthermore, the diversification ratios have been adjusted to the effect that an individual asset may in future account for 20 percent of the total portfolio instead of the previously admissible 10 percent. For products exclusively distributed to professional investors, there will be no diversification requirements in future.
Furthermore, as part of the reform, the permissible debt ratio was increased from 30 percent to 50 percent for products that are also marketed to non-professional investors and from 30 percent to 100 percent for products for professional investors. In future, ELTIF managers will also be able to pursue leverage strategies by taking out cash loans.
Key changes for (retail) investors
For retail investors, too, the reform of the ELTIF Regulation provides for amendments intended to facilitate investments in ELTIF at the same time strengthening investor protection. The previous minimum investment amount of EUR 10,000 and the 10 % cap for retail investors with liquid assets of less than EUR 500,000 have been abolished. For products with a term of at least ten years, however, a warning note regarding the long term is required.
In order to ensure a continued sufficient investor protection, despite the abandonment of the separate suitability assessment required under the ELTIF Regulation, pre-contractual advice to retail investors will be subject to comprehensive requirements and, with regard to the suitability assessment, reference is made to Directive 2014/65/EU (MiFID II). Even if the suitability assessment’s outcome is negative, the investor may invest, provided he expressly agrees that he wishes to enter the ELTIF.
In addition, retail investors will be able to obtain comprehensive information on ELTIFs, ELTIF managers and the authorities responsible for ELTIFs in the ELTIF register. The existing quarterly notification obligation of the competent authorities regarding granted and withdrawn authorizations of ELFITS has been changed to a monthly notification obligation in favor of investor protection.
Effective date and outlook
The reform of the ELTIF Regulation entered into force on the 20th day following its publication in the Official Journal of the European Union on March 20, 2023, i.e., on April 8, 2023. Due to the transitional regulation, the revised ELTIF regulations will apply from April 10, 2024, after a nine-month grace period.
Authorized ELTIFs that were already launched before the reform came into force will be grandfathered for a period of five years, i.e., until January 10, 2029. Furthermore, an ELTIF authorized before January 10, 2024, may already be subject to the new regulations, provided the ELTIF’s competent authority is notified accordingly.
By removing existing restrictions, the reform of the ELTIF Regulation paves the way for ELTIFs to establish themselves as a serious asset class. Especially for sustainable projects, ELTIFs are a good financing option, but without being limited to them.
Whether and to what extent the goal pursued by the European legislator of increasing the acceptance and attractiveness of ELTIFs will materialize remains to be seen. However, the increase in market volume by around EUR 3.94 billion compared with 2021 and the announcement by various providers in Germany that they will launch ELTIFs indicate the potential and an initial upswing.
If you have any questions regarding the new ELTIF Regulation or other supervisory issues, please do not hesitate to contact us.