European Union: The Revised European Long-Term Investment Funds Regulation

The investment landscape is changing at pace, with major themes such as sustainability, deglobalisation and demographic changes motivating investors to seek opportunities in private markets. The revamped European Long-Term Investment Fund ("ELTIF") regime has therefore arrived at an opportune time and is likely to prove a highly attractive framework for fund managers providing long-term investment solutions to retail investors.

The regulation on European Long Term Investment Funds (the "ELTIF Regulation") introduced a new type of fund "brand" that allows retail and professional investors to invest in companies and projects that need long-term capital. ELTIFs are European alternative investment funds ("AIFs") managed by an EU alternative investment fund manager ("AIFM") that meet the criteria set out in the ELTIF Regulation in order to use the "ELTIF" label.

Since the introduction of the ELTIF in 2015, there has been limited take-up of this new type of AIF in only a few EU member states.¹ In November 2021, the European Commission (the "Commission") proposed a revised ELTIF Regulation, providing more flexible investment rules and removing barriers to retail participation, while also allowing for investments that would support the EU's Green Deal. "ELTIF 2.0" was published in the Official Journal of the EU on 20 March 2023 and will apply from 10 January 2024.

A key impetus for the introduction of the ELTIF was to create a source of funding for infrastructure and other long term projects as an alternative to bank lending or raising capital on the stock exchange, and ultimately to promote European economic growth. Supporting the take up of ELTIFs has been identified by the Commission as a priority work area within the Capital Markets Union ("CMU") project. ELTIFs are intended to be particularly attractive to pension funds, large insurance companies and other entities which have longer-term liabilities and accordingly, are seeking to generate long-term returns within a regulated fund structure.

The ELTIF Regulation lays down harmonised EU rules relating to the authorisation, investment policies and operating conditions for ELTIFs. As a regulation, its provisions are directly applicable across member states and therefore no national implementing measures are required.

Structure and Authorisation

ELTIFs will, in principle, be closed-ended investment vehicles and so targeted at investors who are willing to "lock-up" their investment in the long term. As a general rule, an ELTIF will not be permitted to offer investors the ability to redeem their investment before the end of the life of the ELTIF. The end of life is a specific date that should be clearly stipulated in the ELTIF's constitutional document and disclosed to investors. The life of the ELTIF must be consistent with the long-term nature of the ELTIF and shall be sufficient in length to cover the life-cycle of each of the individual assets of the ELTIF. Early redemption rights may be made available in certain circumstances to incentivise investors who may not be willing to lock their capital up for a long period of time (see further below under Redemption and Disposal of Shares).

Only an EU alternative investment fund ("AIF") may be authorised as an ELTIF and only managers who are authorised under the Alternative Investment Fund Managers Directive ("AIFMD") can manage and market an ELTIF. The main distinction between the AIFMD and the ELTIF framework is that ELTIFs, unlike AIFs managed by AIFMs, may be marketed to retail investors using a pan-European passport.

The ELTIF Regulation provides that an ELTIF must apply for authorisation to its home member state and as part of its application must submit:

• its constitutional documentation;
• the name of the proposed manager and depositary; and
• where the ELTIF can be marketed to retail investors, a description of the information to be made available to investors.

Where the ELTIF is a master-feeder structure, further information on the master ELTIF and on the structure will be required.

The proposed manager of an ELTIF must also apply to the home member state of the ELTIF for approval to manage the ELTIF. The application for approval of the ELTIF manager must include:

• a written agreement with the depositary;
• information on the delegation arrangements regarding portfolio and risk management and administration; and
• information about the investment strategies, risk profile and other characteristics of AIFs which the EU AIFM is authorised to manage.

Where the home member state of the ELTIF is the same as that of the EU AIFM being appointed as manager, an application for approval of the manager may refer to the documentation submitted for authorisation under the AIFMD.

The ELTIF Regulation provides that the home state regulator has a period of two months during which to consider an application for the authorisation of an ELTIF, such time limit being extended to three months in the case of an internally-managed ELTIF.

The manager of an ELTIF will be responsible for ensuring compliance with the ELTIF Regulation and may be liable for losses or damages resulting from non-compliance under both the ELTIF Regulation and the AIFMD.

Investment Policies and Eligible Assets

The ELTIF Regulation provides that an ELTIF may invest only in: (a) eligible investment assets; and (b) the UCITS eligible assets specified in the UCITS Directive. ELTIF 2.0 widens the range of eligible assets in which an ELTIF can invest. Eligible assets must now represent at least 55% of the ELTIF's net assets (amended from 70% in the first iteration of the ELTIF Regulation).

The recitals to ELTIF 2.0 note that eligible investment assets should be understood to exclude works of art, manuscripts, wine stocks, jewellery or other assets which do not in themselves represent long term investments in the real economy.

"Eligible investment assets" are defined as:

• equity or quasi-equity instruments which are issued by a qualifying portfolio undertaking or the parent of qualifying portfolio undertaking which is a majority owner of the qualifying portfolio undertaking;
• debt instruments issued by a qualifying portfolio undertaking;
• loans granted by the ELTIF to a qualifying portfolio undertaking which mature within the life of the ELTIF;
• units or shares of one or several ELTIFs, European Venture Capital Funds ("EuVECAs") and European Social Entrepreneurship Funds ("EuSEFs"), UCITS and AIFs, provided that those funds also invest in eligible investments and have not themselves invested more than 10% of their capital in any other investment fund (this limit does not apply to feeder ELTIFs);
• real assets. The threshold of a minimum value of €10 million or the equivalent in another currency has been removed in ELTIF 2.0 and there is no longer a requirement of economic or social benefit;
• simple, transparent and standardised ("STS") securitisations; and
• green bonds.

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Footnote

1. As at 28 November 2023, there are 81 ELTIFs listed on the register maintained by the European Securities and Markets Authority. The aggregate size of net assets of ELTIFs was estimated at approximately €2.4 billion in 2021.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.