ELTIF Reform

On 19 October 2020, the European Commission published a public consultation on the review of the European long-term investment fund (ELTIF) regulatory framework, with the aims of enhancing the attractiveness of ELTIFs for long-term investment projects and increasing the number of ELTIFs, thereby increasing the overall investment in the real economy. The consultation, which closes on 19 January 2021, will feed into the policy work of the Commission in assessing the ELTIF regulatory framework and preparing policy proposals in this area. A legislative proposal is planned for Q3 2021.

Low take-up; high potential

ELTIFs are a subset of the AIFMD framework, and as such are EU alternative investment funds managed by EU-authorised alternative investment fund managers. The ELTIF framework was intended to allow investors to invest into companies and projects that need long-term capital, and the governing Regulation lays down uniform rules on the authorisation, investment policies, and operating conditions of ELTIFs. They are capable of being marketed to professional investors and, under certain conditions, to retail investors under a pan-European passport. See our client guide to ELTIFs, available here.

According to the Commission, since the adoption of the ELTIF framework in April 2015, only a small number of ELTIFs have launched with a relatively small amount of net assets under management (total AuM below €2bn). There are currently approximately 27 ELTIFs in the EU, while it is estimates that only 22 ELTIFs are being marketed. A number of Member States have no domestic ELTIFs.

However, the ELTIF has the potential to be a key vehicle in the EU’s drive to increase capital flows into long-term real economy investments such as social and infrastructure projects, real estate and SMEs, and to further the ambitions of the EU’s Capital Markets Union, the European green deal and the digital single market. Interestingly, we are seeing a fresh appetite for ELTIFs, particularly in Luxembourg, and are currently advising on a number of new ELTIF launches.

In June 2020, the High Level Forum on the Capital Markets Union made a set of specific recommendations for the ELTIF framework in its final report, including:

• looking at structural features to encourage a wider range of investors;
• broadening the scope of eligible assets and investments;
• permitting greater borrowing; and
• simplifying tax rules applicable to ELTIFs, including withholding tax and tax incentives to encourage long-term investment in SMEs.

The HLF saw ELTIF reform as a chance to create a significant late-stage venture capital financing vehicle to rival US Business Development Companies (BDCs), as well as a chance to have a suitable vehicle to promote a European cross-border private credit market.

Scope of the review and policy options

The Commission published an Inception Impact Assessment on 16 September, a type of EU roadmap which the Commission uses to define the scope of legislative reviews, to outline policy options and to describe the main features of the consultation strategy.

In its initial assessment, the Commission outlined the predicted economic, social, administrative and environmental impact of a reformed ELTIF and reflected some of the previous stakeholder feedback (including the HLF recommendations) on what reforms would be required, notably:

• Supply side issues: considering eligible assets and investments and the modification of borrowing limits; and
• Reducing demand side barriers to investment: looking at aligning national measures related to the retail passport and encouraging participation from a wider range of investors.

The Commission at that stage confirmed it would not consider issues concerning Member States’ tax incentives in the review as they fall outside its mandate under the EU Treaties.

The consultation

In its consultation, the Commission is seeking views on a wide range of topic areas, and respondents can provide feedback via a short-form or long-form version of the questionnaire. Topics include:

• Scope of the ELTIF authorisation and process – is the scope of authorisation and operating conditions appropriate? How should the ELTIF framework be amended to enhance the use of the ELTIF passport?
• Investment universe, eligible assets and qualifying portfolio undertakings – the Commission lists various asset types, including innovative technologies and green/sustainable investments among others, which could be included as eligible assets, and asks whether any definitions should be clarified, including “long-term”, “capital” and “debt”, among others. Views are also sought on the requirements relating to eligibility of investments such as asset size, use of ELTIFs as fund of funds, and investments in third countries.
• Types of investors and effective investor protection – should the minimum ticket size, net worth, suitability and certain other requirements for retail investors be amended? The Commission also wants to hear about key barriers, whether regulatory or of another nature, for institutional investors using ELTIFs.
• Conflicts of interest – are the current rules appropriate and proportionate? What types of mandatory disclosures should apply and how should they be tailored for different investors?
• Borrowing of cash and leverage – what policy choices would be useful here?
• Rules on portfolio composition and diversification – do these rules need to be amended, and is the current minimum threshold of 70% of eligible assets appropriate?
• Redemption rules and life of ELTIFs – are the rules on redemption policy and the lifecycle of ELTIFs appropriate? Should mid-term or regular redemptions be allowed? Should the rules on issuance of new shares or units be amended?
• Marketing strategy for ELTIFs and distribution related aspects – what are the key limitations currently reducing the attractiveness of ELTIFs?
• Miscellaneous – are there examples of gold plating which might impair the effectiveness of the ELTIF framework? How could costs and compliance burdens be lowered? Are there examples of national tax regimes that might reduce the attractiveness of the ELTIF frwamework vis-à-vis other national fund vehicles?

Next Steps

The public consultation closes on 19 January 2021. The main webpage for the consultation is available here; it includes a link for responses. We are working with various industry bodies and will be contributing to their consultation responses.

The overarching webpage for the ELTIF framework review is available here, and includes a useful timeline for the review. The Commission is expected to publish a legislative proposal in Q3 2021.

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