Efforts to rescue the stricken ELTIF are underway, as EU regulators update the rules to make the product more appealing to retail and institutional investors. JTC Group managing director Richard van’t Hof explores what the changes mean.

Unveiled eight years ago, the first version of the European Long-Term Investment Fund (ELTIF) was designed to allow retail investors to gain exposure to long-term or illiquid assets, including infrastructure, real estate, unlisted companies, or green projects in the EU.

Although a good idea in principle, ELTIFs did not take off, as the structure was viewed by investors as being excessively complex and inefficient. As a result, just 89 ELTIFs were ever launched, which between them managed only €10bn in assets. Amendments to the ELTIF provisions – otherwise known as ELTIF 2.0 – were introduced in April 2023 and will come into effect on 10 January 2024. So, what does ELTIF 2.0 mean for the industry?

Improvements

ELTIF 2.0 makes a number of improvements to the existing regulatory regime, benefiting both managers and investors. Firstly, the rules around asset eligibility have been loosened.

Highlights here include a simplified definition of what qualifies as a real asset; eased restrictions on investing into non-EU assets; improved structuring options for indirect investments, master feeder structures and fund-of-fund strategies; and fewer constraints around borrowing (albeit only for funds being sold to professional investors).

The ELTIF portfolio composition and diversification rules have been tweaked for the better. For example, the rules reduce the minimum capital threshold for which ELTIFs must invest into eligible assets from 70% to 55%. This has obvious liquidity advantages.

ELTIF 2.0 makes a number of improvements to the existing regulatory regime, benefiting both managers and investors

Furthermore, the ceiling has been increased from 10% to 20% for investments into: single real assets; instruments issued by a single qualified portfolio undertaking; simple, transparent, standardised securitisations; and units/shares of any single ELTIF/European Venture Capital Fund/European Social Entrepreneurship Fund/UCITS/EU alternative investment fund.

ELTIF 2.0 also provides investors with redemption rights during the fund’s lifecycle under a specific set of circumstances, although the precise terms and conditions have yet to be made public by the European Securities and Markets Authority (ESMA).

And finally, the latest ELTIF amendments are expected to have a positive impact on distribution. This is because ELTIF 2.0 removes the €10,000 initial minimum entry ticket requirement and the investment cap of 10% for retail investors whose portfolios do not exceed €500,000.

Will it work?

Notwithstanding the final outcome of the ESMA consultation, JTC Group is working on a number of projects with clients who are exploring the merits of whether to leverage ELTIF 2.0.

Based on our conversations with clients, many are supportive of the ELTIF 2.0 revisions, as they believe they will stimulate investment into illiquid assets and make distribution to retail allocators that bit easier.

This also comes as more retail clients – hungry for returns and risk diversification – are now investing into private markets, an asset class that was historically only accessible to large institutions. According to an Investment Week report from May 2023, individual investors hold 50% of the estimated $275-290trn in global assets, yet account for just 16% of the assets managed by alternative investment funds.

As a result, we anticipate there will be significant interest in the revamped ELTIF wrapper, and this could translate into substantial inflows.

Ensuring the success 
of ELTIF 2.0

While EU regulators have made ELTIFs more enticing, asset managers need to ensure they select the right sort of service provider and jurisdiction when launching these products.

Boasting excellent regulations that support investor protection and encourage product innovation, Luxembourg – Europe’s premier investment fund centre and the second largest investment fund centre in the world – is well placed to accommodate the ELTIF 2.0.

In fact, due to its position at the heart of Europe in terms of geography and financial services, with a multilingual, highly skilled and experienced workforce, it has already proven to be a leader in ELTIFs in their original form.

Boasting excellent regulations that support investor protection and encourage product innovation, Luxembourg is well placed to accommodate the ELTIF 2.0

Of the ELTIFs already in existence, Luxembourg has positioned itself as the leading jurisdiction in terms of AUM as well as number of funds, with 60% of launched ELTIFs registered in the country, according to the Association of the Luxembourg Fund Industry’s annual report for 2022-23.

JTC Group in Luxembourg offers a number of extensive services to ELTIFs, including fund administration, accounting and reporting, domiciliation, directorship and management, regulatory and investor reporting, and transfer and investor services.

At JTC, we are prepared for the changes, as we operate a variety of best-in-class systems to deliver and maintain an impeccable standard of administration, while also using technology to innovate in both service delivery and efficiency.

The EU is confident that the new ELTIF 2.0 can not only save a sinking ship, but relaunch it to a wider world and capture the imagination of the public. Hopefully, this rising tide will raise all European funds with it.

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