Its name is ELTIF or European Long Term Investment Fund.
Its purpose is to boost European long-term investments in the real economy, especially infrastructure.
It will come into effect 6 months after the publication in the EU Official Journal, expected for the beginning of the year.
Why is it an innovative product? What are its main characteristics? What are the market opportunities?
It should contribute to the European growth agenda
The aim of the ELTIF is to encourage a wider range of sources to finance the European economy. In particular it raises and channels capital towards European long-term investments by creating a new form of fund vehicle. This regulation is important for the Commission’s ambition to foster long term financing and contribute to the creation of the “Capital Market Union”, and its objective of smart, sustainable and inclusive growth. See the video above for more on the Capital Market Union.
Large range of eligible assets
As well as unlisted SMEs and infrastructure projects, ELTIFs can invest in real estate (when the investments are sustainable and long-term), intellectual property and listed SMEs with a market capitalisation of less than EUR 500 million. Direct holdings of over EUR 10 Million in real assets such as energy, transport, communication, education, health and so on are eligible provided that they yield a predictable return. Conversely, assets like art and wine will probably not be eligible. ELTIFs must be at least 70% invested in eligible assets.
Who will be interested in the product?
While by nature providing less liquidity than investments in transferable securities – as they come with a commitment for a certain period of time – ELTIFs can provide regular income streams for pension funds, insurance companies, foundations and individual investors that rely on the regular cash flow that an ELTIF can produce. In this way, ELTIFs fit into the EIB’s objective of contributing to balanced, steady development in Europe.
Open to retail investors
The ELTIF will be a unique brand available for both retail and professional investors or – at the manager’s discretion – for professional investors only. Until now retail products, including the famous UCITS, were short-term products, which could be redeemed at any time. Long term investments, that can bring better performance, were reserved for institutional investors.
ELTIFs may be marketed cross border to retail investors who have accumulated a portfolio (composed of cash deposits and financial instruments) of more than EUR 100,000, provided they invest no more than 10% of their portfolio in the new product.
Closed-ended and of defined life fund
ELTIFs have the particularity of being closed-ended funds – the illiquid nature of most investments in long-term projects would normally prevent such a fund from offering regular redemptions to its investors. However, in order to incentivise retail investors who might not be willing to lock-up their capital for a long period of time, the Manager may decide to offer early redemption rights if certain conditions are met.
ELTIFs’ shares may be admitted to trading on a regulated market, thus providing investors with an opportunity to sell their shares before the end of life of an ELTIF.
ELTIFs are AIFs
The new rules on ELTIFs are closely linked to the Alternative Investment Fund Managers Directive. By definition, ELTIFs are EU AIFs that are managed by AIFMs. However ELTIFs have a more limited scope. Only an EU AIF is eligible to become an authorized ELTIF and only if it is managed by an EU AIFM.
This innovative product should enable new money, a lot of it currently placed in cash and deposit accounts, to be invested by smaller investors and High Net Worth individuals into the EU economy through real assets, especially infrastructure projects.
Remains to be seen if the minimum investment threshold of EUR 10.000 and the maximum limit of 10% investment in ELTIF will not limit the product development potential for retail investors.
In any event, the expectation is that there will be high demand for this new product from institutional investors seeking yields higher than state bonds in the long-term, which will contribute to the renovation of aging infrastructure in Europe and to the financing of new infrastructure projects.