ELTIFs (European Long-Term Investment Funds)

Key Takeaways

• ELTIFs are regulated investment vehicles that allow retail investors to participate in long-term private equity, private debt and real assets including infrastructure investments.
• ELTIFs provide a regulated investment vehicle where the minimum investment amount is typically set between €10,000 and €25,000, making it much more accessible for a retail investor than investing directly into private assets, where minimums are typically several million.
• Rules and prohibitions govern what ELTIFs can and cannot do, providing basic protections for investors, for example through diversification requirements which limit the exposure to a single investment.
• ELTIFs are typically closed-ended meaning that capital is locked away for the duration of the fund’s life.

What is an ELTIF?

A European Long-Term Investment Fund (ELTIF) is an investment vehicle that makes long-term investments into private (unlisted) assets. ELTIFs are regulated investment funds with low minimums, designed to be accessible to all investors. Previously, private investments were only available to high-net-worth and institutional investors. Non-ELTIF funds investing in private assets have high minimums and are unregulated, and therefore not available to retail investors.

ELTIFs were introduced in 2015 to help facilitate the long-term financing of companies and projects by reducing regulatory obstacles that limited the number of available investors. The aim of ELTIFs is to provide investors with the ability to participate in the long-term, stable returns offered by a diversified and restricted pool of private investments.

ELTIFs are typically structured as closed-ended funds with a defined maturity date. With some exceptions, that means investors enter the fund at one particular point in time and exit the fund at one particular point in time. Investment horizons with ELTIFs are usually 8-10 years making them similar to regular private equity funds. However, ELTIFs tend to target shorter investment periods than traditional PE funds to reduce the cash drag on the IRR, in the case of fully funded ELTIFs.

What are ELTIF 2.0 regulations & rules?

• Authorisation – To be marketed in the EU, an ELTIF must be in compliance with the Alternative Investment Fund Managers Directive (AIFMD), published in 2011, which created the regulatory framework for all EU alternative investment fund managers, as well as to the ELTIF Regulation..
• Investment rules – ELTIFs must invest at least 55% of their capital in “eligible investment assets” and must not invest more than 20% of their capital in any single asset. Additionally, ELTIFs that are marketed to retail investors may borrow no more than 50% of their respective Net Asset Value (NAV) and must disclose all borrowings.
• Prohibitions – ELTIFs may not engage in short selling, securities lending, securities borrowing or repo transactions, purchase commodities, or use derivatives for anything other than hedging.

Click to explore more of the new rules and opportunities presented by ELTIF 2.0.

Risks and Complexities

In general, the complexities associated with a closed investment structure in non-public assets will also exist in ELTIFs, such as the illiquid nature of the assets, the long-term investment horizon, and the inability to value the investment on a daily basis. Investors in ELTIFs should view their investments as essentially being inaccessible for the duration of the life of the ELTIF.

What do ELTIFs invest in?

Subject to the investment rules and prohibitions mentioned above, ELTIFs can invest in assets such as private debt or equity in private European companies, venture capital, real assets, and infrastructure projects. Under the ELTIF 2.0 rules, they will be able to invest in other funds and other ELTIFs, thereby forming “fund of funds” opportunities for investors. Such other funds have to meet certain eligibility criteria, for example, have an EU Alternative Investment Fund Manager.

Advantages of ELTIFs

ELTIFs offer the following advantages to investors:

• Distribution to retail and professional investors across the EU with a single EU distribution ‘passport’.
• Investment minimums of €10,000, which can be even lower under ELTIF 2.0
• Typically they are fully funded investment vehicles that will not subject them to capital calls or intermittent distributions (though some ELTIFs may still be issued with capital calls and distributions.)
• Defined investment parameters that ensure diversification and limit leverage while prohibiting short selling, and certain other activities.
• Protections afforded by EU Regulation such as prohibitions on short selling, limitations on leverage, and diversification requirements.
• Investing in long term private assets could provide diversification benefits as part of a wider portfolio, as well as offer an attractive ‘illiquidity premium’ compared to more traditional asset classes like listed equities and bonds.

By creating a regulated vehicle through which to offer private investments and allowing minimum investment requirements that are more affordable to retail investors, ELTIFs represent a viable way to expand private equity investment to more investors while at the same time making more capital available to private companies and stimulating growth throughout the EU.

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