ELTIF 2.0: Revised regulation expands investment horizons for retail investors

The European Union Council, in October 2022, announced that an agreement had been reached with regards to the review of Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (the “ELTIF Regulation”), to make the European Long-term Investment Funds (“ELTIF”) more attractive for investors and facilitate the access of retail investors to long-term investment opportunities.

On the 7th of December 2022, a draft regulation amending the ELTIF Regulation (the “ELTIF 2.0”) was provisionally agreed, which after some tuning has now been published. The ELTIF 2.0 removes obstacles and expands investment horizons for both professional and retail investors to access long term investments while making sure investors are strongly protected.

The review introduces increased flexibility by simplifying the ELTIF’s distribution, with the goal to make it the go-to fund structure for long-term investments in the EU.

The Revised Regulation. The ELTIF 2.0.

The ELTIF 2.0 will expand its scope of eligible assets. The ELTIF 2.0 will permit investments in EU AIFs managed by EU AIFMs which are invested in eligible assets under ELTIF 2.0. It will grant the possibility to invest in standardized securitisations, as well as in green bonds issued in accordance with the Regulation of the European Parliament and of the Council on European Green Bonds currently in drafting. It also removes the minimum threshold for real estate strategies and simplifies the definition of real BE. This could entail the growth of ELTIFs investing in infrastructure.

By defining the option for indirect investments and permitting co-investments if the ELTIF has organizational and administrative measures in place to mitigate any conflicts of interest, ELTIF 2.0 also offers increased structure freedom.

ELTIF 2.0 will also bring a wider range of qualifying portfolios, accommodating investments in FinTechs and increasing qualifying portfolio undertakings maximum market capitalisation from 500,000€ to 1,500,000€, provided such undertakings are not blacklisted in the EU.

By decreasing its pocket for long-term illiquid investments from 70% to 55% and increasing its pocket for liquid investments (i.e. UCITS-eligible assets) from 30% to 45%, ELTIF 2.0 will undoubtedly achieve a better liquidity profile. With this added structure flexibility, the risk diversification rules for both liquid and illiquid investments have been amended accordingly.

ELTIFs will now be able to offer liquidity to retail investors by permitting before the end of the ELTIF’s life, the possibility of an optional liquidity window by the secondary trading mechanism. ELTIF managers shall implement a matching mechanism, which ensures equitable treatment of investors and manages liquidity risks. ELTIF managers shall implement a set of liquidity management instruments to prevent liquidity imbalances.

EU green bonds that meet the eligibility requirements of the ELTIF Regulation (are introduced as eligible investment assets).

Distribution. Making life easier for retail investors.

The new rules included in ELTIF 2.0 are sure to make life easier for retail investors who wish to invest in ELTIFs, whilst ensuring investor protection.

ELTIF 2.0 aligns Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (the “MiFID II”) suitability test requirements. Retail investors shall receive written notice to that the ELTIF product might not be acceptable if the investor is unable to sustain a long-term commitment.

The minimum investment holding requirement of 10,000€ and the 10% exposure cap for retail investors whose financial portfolios are below 500,000€ are eliminated by ELTIF 2.0 in compliance with the realignment to MiFID II. The scrapping of the prior “entry ticket” is a much-anticipated reform since it restricted access to ELTIFs for some retail investors.

The proposed amendments also provide a lighter regime for investors who are senior officers, portfolio managers, directors, officers, or representatives or employees of AIFM or affiliates of ELTIF’s AIFM.

Entry into force and transitional period

The revised ELTIF rules are expected to come into force in the first quarter of 2024. However, from the effective date of the revised ELTIF rules, scheduled for April 2023, it will be possible to opt-in to the new regime. A five-year transition period from the date of application will allow ELTIF managers sufficient time to adapt to the new regime.

Get in touch with our team in Luxembourg for more information.