Advent of a two tier Europe?
On 23 March 2015, the Council of the EU published the text of the Regulation on European Long-Term Investment Fund (Regulation), which they are expected to formally approve without further amendment.
The European Long-term Investment Fund (ELTIF) is a new fund structure aimed at promoting sustainable long-term investment in the European economy. Its focus is on investment in long term projects including infrastructure, loans, real assets, sustainable energy, and new technologies.
As ELTIFs are available to both retail and institutional investors, they potentially herald the advent of a two-tier alternative fund regime in Europe: AIFs which are pass-portable to professional investors under AIFMD, and ELTIFs which may also be passported under AIFMD to retail investors.
The rationale behind the ELTIF
The European Commission estimates that existing infrastructure transaction volumes at €100-€150 billion a year. They also estimate that €1,500 to €2,000 billion will be needed to finance infrastructure project needs in Europe up to 2020. One of the drivers behind the establishment of the ELTIF was to create a source of funding for these infrastructure and other long term projects, and to ultimately foster growth within the European real economy.
The Commission anticipates that pension funds and insurance companies will be the primary investors in ELTIFs matching longer term liabilities with long term investments. Individuals planning for retirement will also benefit from regular returns afforded by long-term investments. In addition, ELTIFs will quality for stream-lined and prioritised financing from the European Investment Banking Group.
Given their purpose of driving growth in the European real economy, ELTIFs investment restrictions are designed to channel their funds towards non-financial businesses and long term projects which have a social entrepreneurship or venture capital focus.
The investments must be made to ‘qualifying portfolio undertakings’, ie, undertakings (other than collective investment schemes, financial undertakings, or listed companies) and small or medium listed companies which are established in the EU or in a third country that has a cooperation arrangement with the EU (QPUs).
An ELTIF must invest at least 70% of its capital in “eligible investment assets” (as explained below), subject to portfolio and diversification rules. These include equity, debt or quasi equity instruments issued by QPUs; loans granted to QPUs; and holdings of individual real assets worth at least EUR10million. ‘Real assets’ include infrastructure and other assets which enable economic or social benefit such as education, counselling, or research and development. Commercial and residential property are included when they are integral or ancillary to a long-term investment project which contributes to smart, sustainable and inclusive growth in Europe.
Up to 30% of the ELTIF’s capital amount may be borrowed to acquire eligible investment assets, if the ELTIFs holdings are insufficient to acquire the asset. Given that AIFMD allows funds to set their own borrowing restrictions, the 30% limit on borrowing has been viewed by some as restrictive.
In principle, ELTIFs must be closed-ended. However, the manager can in certain circumstances set out in its constitutional documents decide whether early redemption rights are appropriate to incentivise investors, in particular retail investors. The focus here is on protecting any remaining investors and the viability of the long term investments made by the ELTIF. Such early redemption is allowed from five years after the authorisation of the ELTIF, or after half the ELTIF’s life-time (whichever is earlier).
ELTIFs are subject to special authorisation - the ELTIF must have an AIFM authorised under AIFMD, while the fund itself must apply for a particular ‘ELTIF’ authorisation and cannot convert to a non-ELTIF fund.
In addition to complying with AIFMD’s disclosure requirements, an ELTIF’s annual report must contain information on participation in instruments involving EU funds, and information on the value of the assets. ELTIFs marketed to retail investors must also comply produce a ‘Key information document’ under the PRIIPS Regulation.
The Council of the EU is expected to formally adopt the published text without further amendments. The ELTIF is expected to be enacted and available for authorisation before the end of 2015.