European long term investment funds or “ELTIFs”, are designed to boost non-bank investment in the real economy across Europe by channelling money into a broad range of asset classes. These include infrastructure projects, real estate and listed and unlisted SMEs, each of which may require long-term capital investment. They will enable pension funds, insurance companies, professional and, subject to a minimum investment requirement, retail investors to invest in these asset classes, provided that such investment benefits the EU economy.
Benefits of the ELTIF
- ELTIFs offer the possibility of marketing alternative investment funds, such as infrastructure funds and private equity funds, cross border to retail investors.
- Although ELTIFs are designed for investment in illiquid asset classes, retail investors will be given an early redemption option and the shares of an ELTIF may be admitted to trading on a regulated market or multilateral trading facility. These features will make the ELTIF more marketable to retail investors and pensions funds.
- ELTIFs will provide a steady income stream and produce attractive long term yields.
- It will be possible for a UCITS to invest in shares or units issued by an ELTIF to the extent that the relevant ELTIF’s shares or units are eligible assets for the purposes of the UCITS Directive.
ELTIFs may accept subscriptions from:
- Any investor who is a professional client within the meaning of MiFID II which is defined as a client who possesses the experience, knowledge and expertise to make its own investment decisions.
- Any investor who elects to be treated as a professional client within the meaning of MiFID II.
- A retail investor who has an investible portfolio of less than €500,000, provided he/she invests no more than 10% of their portfolio into ELTIFs.
ELTIFs may invest in or gain exposure to either “qualifying portfolio undertakings” or certain categories of “real assets”.
Qualifying Portfolio Undertaking
A qualifying portfolio undertaking is an entity that fulfils all of the following requirements:
- It is established in a Member State of the EU or a third country which is not considered high-risk and has signed agreements with various relevant Member States.
- It is not a credit institution, MiFID investment firm, insurance undertaking, financial holding or mixed activity company, UCITS management company or AIFM.
- It is not admitted to trading on a regulated market or multilateral trading facility (each as defined in MIFID II) or it is admitted to trading on a regulated market or multilateral trading facility but has a market capitalisation of less than €500 million.
Companies in the same group for the purposes of consolidated accounts shall be regarded as a single qualifying portfolio undertaking.
The following instruments and loans issued by or granted to a qualifying portfolio undertaking shall be eligible for investment by an ELTIF:
- Equity instruments issued by a qualifying portfolio undertaking.
- Quasi-equity instruments issued by a qualifying portfolio undertaking, such as subordinated loans, silent participations, participating loans, profit participating rights, convertible bonds and bonds with warrants.
- Debt instruments issued by a qualifying portfolio undertaking.
- Loans granted by the ELTIF to a qualifying portfolio undertaking where the loan has a maturity no longer than the life of the ELTIF.
- Other ELTIFs, EUVECAs or EUSETs that have not themselves investment more than 10% of their capital in ELTIFs.
An ELTIF may invest directly in an individual “real asset” with a value of at least €10 million and may also invest in any such real asset indirectly via a qualifying portfolio undertaking. The ELTIF Regulation states that real assets include, but are not limited to, infrastructure, intellectual property, vessels, equipment, machinery, aircraft or rolling stock and commercial or residential property.
Portfolio Composition and Diversification
An ELTIF must invest at least 70% of its capital in the eligible investments listed above. However, the application of this requirement may be deferred to a date that is 5 years or half the life of the ELTIF (whichever is the earlier) after the date of authorisation of the ELTIF.
An ELTIF may not take exposure to commodities, short sell, use financial derivative instruments (other than for hedging purposes), or invest directly or indirectly in commodities or invest more than 10% of its capital in securities lending, securities borrowing, repurchase agreements or reverse repurchase agreements. The aggregate risk exposure of an ELTIF to a repo counterparty shall not exceed 5% of its capital.
Investment in Derivatives
ELTIFs may only use derivatives for hedging purposes. The aggregate risk exposure to a counterparty of the ELTIF stemming from over the counter (OTC) derivative transactions shall not exceed 5% of its capital.
In summary, the ELTIF is an innovative fund product designed to encourage long term investment by institutional and retail investors. As reported in the January 2016 edition of our e-zine, the Central Bank of Ireland is the competent authority for the purposes of the ELTIF Regulation and it has confirmed that it is ready to accept applications for establishment of an ELTIF.
Contributed by Niall Crowley