The revised version of the European Long-Term Investment Fund (ELTIF) Regulation that entered into force in January of this year is designed to make it easier for asset management companies to offer investors long-term capital placement possibilities.

ELTIFs may, for example, invest in private equity (i.e. investments in non-listed enterprises), private debt (alternative debt financing) or in long-term infrastructure projects, such as projects from the renewable energies area. They thus represent an alternative to banks as a means of financing infrastructure projects, non-listed enterprises or listed small and medium-sized enterprises (SMEs).

The legal basis for ELTIFs is Regulation (EU) 2015/760, which entered into force on 9 December 2015. Since then, however, very few asset management companies have launched ELTIFs. The European legislator responded by thoroughly revising the ELTIF Regulation, with the new version in force since 10 January 2024 (Regulation (EU) 2023/606). What exactly has changed?

Broadening the range of eligible investment assets

To promote investments in securitised assets and more environmentally sustainable investments, the European legislator has extended the list of investment assets eligible for ELTIFs. The list now also encompasses simple, transparent and standardised securitisations with long-term exposures as well as green bonds from qualifying portfolio undertakings as defined in the ELTIF Regulation.

Moreover, the new regulation also makes it possible to acquire units or shares in undertakings for collective investment in transferable securities (UCITS) and in EU alternative investment funds (EU AIFs) managed by EU AIF managers (EU AIFMs). This is subject to the condition that these funds invest in assets eligible for ELTIFs and that no fund has invested more than 10 percent of its investment assets in other funds. As a result of this extension, providers of ELTIFs may now also pursue fund-of-funds strategies.

For investments in real assets, the previous requirement for a minimum value of EUR 10 million has been lifted. ELTIFs may now also acquire real assets with values below this threshold. This will contribute to diversifying investment portfolios and is intended to make investments in real assets more attractive.

In the new version of the ELTIF regulation, the European legislator has also raised the investment and issuer limits and now differentiates between ELTIFs that may also be marketed to retail investors and those that may only be marketed to professional investors. The latter are not bound by the aforementioned investment and issuer limits.

Open-ended fund structure admissible subject to certain conditions

The ELTIF Regulation is based on the principle of a closed-ended fund structure. However, by way of exception an ELTIF may also have an open-ended structure. In such cases, the following conditions must be fulfilled:

• Redemption of units or shares may not be granted before the end of the minimum holding period or before the investment limits take effect, whichever is earlier;
• The asset management company must be able to demonstrate to the competent authority that an appropriate redemption policy is in place and that it has liquidity management tools in place that are compatible with a long-term investment strategy;
• The ELTIF must clearly indicate the procedures and conditions for redemptions;
• Redemptions must be limited to a percentage of the investment assets eligible for UCITS;
• Asset management companies must also ensure that investors are treated fairly and, if applicable, that redemptions are granted on a pro rata basis.

ELTIFs now open to retail investors with no restrictions

Retail investors now have unrestricted rights to acquire units or shares in ELTIFs. Under the previous regulation, retail investors whose portfolio did not exceed EUR 500,000 were allowed to invest a maximum of ten percent of this investment portfolio volume in ELTIFs. At the same time, they were required to invest a minimum of EUR 10,000 in ELTIFs. Under the new regulation, such statutory access limitations no longer apply.

Before asset management companies, banks and any other providers sell units or shares in ELTIFs to retail investors, they are required to undertake a suitability assessment and provide investors with a suitability report. This applies no matter whether the products are being marketed directly by the asset management companies or via financial intermediaries. The suitability assessments must meet the requirements of the revised Markets in Financial Instruments Directive (MiFID).

Regulatory standards to specify provisions of the ELTIF Regulation

The European Securities and Markets Authority (ESMA) is entrusted with drafting regulatory technical standards for some areas of the ELTIF Regulation. The objective of these standards is to specify certain provisions of the ELTIF Regulation. They are to be adopted by the European Commission.

Most importantly, the regulatory standards define the conditions for redeeming units and shares in open-ended ELTIFs. Amongst other things, they define criteria for determining the minimum holding period of units and shares in ELTIFs and govern the requirements underlying the redemption rules and the liquidity management tools. Moreover, they define the criteria designed to help determine the percentage of liquid assets for redemption gates relating to the units and shares in an ELTIF.

The ESMA published its draft of the regulatory technical standards on 19 December 2023. Since the European Commission has yet to adopt the draft, the standards are not in force and therefore not binding.

BaFin is in close dialogue with the financial industry on the topic of ELTIFs. On its website, BaFin has published a list of frequently asked questions on the subject of ELTIFs, which is regularly updated and supplemented (only available in German).