On November 25, 2021, the European Commission unveiled a proposal (“ELTIF Proposal”) amending the regulation (EUR 2015/760) as regards to the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules and as regards requirements pertaining to the authorization, investment policies and operating conditions of European long-term investment funds (“ELTIF Regulation”).
The European Council adopted its position on the proposal on 24 May 2022. Following negotiations, the European Parliament found a provisional agreement on October 19, 2022.
Main objectives of the eltif proposal
- Increase the uptake of ELTIFs (only 60 ELTIFs in the EU);
- Enhance ELTIFs’ global competitiveness, and
- To be consistent with the sustainable finance European strategy.
Key terms of the eltif proposal
- Enhance attractiveness of ELTIFs for real estate and financing of small and medium size companies;
- Alleviation of barriers to retail investors’ access to ELTIFs vehicles with a flexible regime, and
- Establishing an optional liquidity window mechanism for redemptions (for investors’ early exit).
- Investment rules
The ELTIF Proposal explicitly allows eligible assets located in third country investments. This should pursue environmental preservation purposes or sustainability projects.
The scope of real assets management is broadened, it comprises now investments in commercial property, education, counselling, research, sport or development facilities or housing (senior residents /social).
The minimum investment in real asset has been lowered to EUR 1 million, instead of EUR 10 million and it is no longer an obligation that real assets are owned directly / indirectly via qualifying portfolio undertakings. This change would make it possible to capture a road range of potential real assets investments strategies.
The ELTIF Proposal allows co-investments in ELTIF by the ELTIF manager, affiliated entities and ELTIF’s staff. The co-investments are subject to compliance with conflict of interest rules such as establish organizational and administrative arrangements to identify prevent, manage and monitor potential conflicts of interest.
The scope of eligible assets for ELTIFs is also broadened to include:
- Residential mortgage-backed securities;
- Commercial loans that are secured by one or more mortgages on commercial immovable property;
- Corporate loans, and
- Trade receivables or other underlying exposures that the originator considers to form a distinct asset type, provided that the proceeds from securitizing these trade receivables or other underlying exposures are used for financing or refinancing long-term investments.
- Market capitalization
The maximum level of the market capitalization threshold defining an eligible small and medium-sized enterprise equity or debt issuer has been raised from EUR 500 million to EUR 1 billion. It is only applicable at the time of the initial investment.
- Portfolio composition
The requirement for an ELTIF to invest 70% of its capital in long term eligible assets has been lowered to 60%. The remainder of the capital should be invested in UCITS eligible assets. Lowering this threshold would promote the flexibility of asset managers in executing their investment strategies.
- Diversification requirements
The maximum retail ELTIF exposures to instruments issued by, or loans granted to, any single qualifying portfolio undertaking has been raised from 10% to 20% of the value of the capital of the ELTIF.
A similar 20% limit also applies to an investment in a single eligible ELTIF, EuVECA, EuSEF, UCITS or of an EU AIF managed by an EU AIFM while a combined limit is set at 40% for these investments in other UCIs.
The current threshold of 5% for eligible assets for UCITS eligible assets has increased to 10%. This limit can be raised to 25% where bonds are issued by a credit institution which has its registered office in a Member State and is subject by law to special public supervision designed to protect bondholders.
The current limit of acquisition of the units or shares of a single ELTIF, EuVECA, EuSEF, or of an EU AIF managed by an EU AIFM eligible by an ELTIF has been raised from 25% to 30%.
The concentration limits may not apply if ELTIFs are marketed solely to professional investors.
Borrowing threshold has been raised from 30% to 50% of the ELTIF value.
The ELTIFs marketed solely to professional investors would be permitted to leverage up to 100% of the value of the capital of the ELTIF.
The 30% encumbrance requirement is deleted, and it is clarified that the encumbering of assets is permitted where it is sought to implement the borrowing strategy.
The ELTIF Proposal allow ESMA to develop draft regulatory technical standards in order to specify the circumstances of redemptions and the information that ELTIFS will need to disclose to investors.
2.Optional liquidity window mechanism
The ELTIF Proposal allows also the possibility to include in the rules / instruments of incorporation of the ELTIF an optional liquidity window mechanism. It is an earlier exit for ELTIF investors with subscription requests by new investors.
The ELTIF manager would have to prepare a defined policy for such optional liquidity mechanism. However, this defined policy should ensure fair treatment of investors and to provide sufficient opportunity for the ELTIF manager to monitor the liquidity risk of the ELTIF.
3. Authorization and registration
The ELTIF Proposal intends to establish an electronic central ELTIF Register, in order to ensure a better visibility of ELTIF Investments and allow investors to obtain and evaluate investment’s opportunities available.
The National competent authority responsible will be solely responsible for the authorization of ELTIF, no more additional authorization or ‘approval’ of the EU AIFM will be required. The National competent authority will need to inform ESMA on any changes regarding ELTIFs on a monthly basis, instead of a quarterly basis.
The ELTIF Proposal also intends to delete the requirement of the AIFM to have its registered office in the ELTIF home member state.
The ELTIF Proposal clarifies the required information to be included in the prospectus. The Feeder ELTIF’s prospectuses should include the following:
- A declaration that the feeder ELTIF invests 85% or more of its assets in units of the master ELTIF;
- Information on the ELTIF’s investment objective and policy;
- A description of the master-feeder ELTIF, and
- A description of the tax implications for the feeder ELTIF of the investment into the master ELTIF.
5. Specific requirements for retail investors – flexible regime
Same regime than ELTIFs marketed to professional investors but with specific features stated as follows:
- Obligation of ELTIF managers and distributors, when directly offering or placing ELTIFs, to carry out the suitability assessment in line with the MiFID II provisions.
- Deletion of the minimum entry ticket of EUR 10,000.
- Deletion of the maximum aggregate of 10% of financial portfolio not exceeding EUR 500,000.
- Two-week withdrawal period solely applies to retail investors and can only be effective during the 2weeks following the effective date of the commitment or subscription agreement (no penalties applies).
- The maximum exposure of a retail ELTIF to securities issued by or loans granted to any single portfolio business rises from 10% to 20%; the 20% threshold also applies to single real assets and eligible securitizations that meet the EU’s simple, transparent and standardized criteria.
- In order to facilitate the marketing of ELTIFs, it can take place now without subjecting ELTIF managers to the requirement to put in place facilities, which are at times construed to imply physical facilities or separate IT, personnel-related or administrative arrangements or requirements.
Following the technical and legal finalization of the European Commission, the finalized text will be submitted to the Council and the European Parliament for adoption.
Samia RABIA, Partner