ELTIFs and CMU
Funnelling investment into SMEs and funds
Recent developments within the European Institutions herald good news for businesses across Europe - several measures are underway to increase funding and growth in the real economy including Capital Markets Union (CMU), the European Long Term Investment Fund (ELTIF) and the ‘Investment Plan for Europe'.
The ELTIF, once launched, is intended as one of the key pipelines for channelling funds from private wealth as well as from European Union entities.
The European Commission announced an 'Investment Plan for Europe' that will unlock public and private investments in the economy of at least €315 billion over the next three years with the establishment of the new European Fund for Strategic Investments. It also published a 'Green Paper on Capital Markets Union' in February 2015, which stated that "to strengthen investment for the long term, we need to build a true single market for capital – a Capital Markets Union for all 28 Member States." Its aim is to get Europe growing again by unlocking investment in Europe's companies and infrastructure. The €315bn investment package will help to kick start that process.
As a key pillar of CMU, it is anticipated that the ELTIF will feature in the investment of that investment package. The European Parliament has stated "Given their focus on categories of long-term assets, ELTIFs can fulfil their designated role as a priority tool to accomplish the Commission’s ‘Investment Plan for Europe".
The ELTIF Regulation mandates the Commission to prioritise and streamline its processes for all applications by ELTIFs for financing from the European Investment Bank Group (EIB). It also mandates the Commission to streamline the delivery of any opinions or contributions on any applications by ELTIFs for financing from the EIB. It is anticipated that this structure will play a large part in future funding such as public/private funding initiatives across Europe.
The ELTIF Regulation mandates the Commission to prioritise and streamline its processes for all applications by ELTIFs for financing from the EIB. It also mandates the Commission to streamline the delivery of any opinions or contributions on any applications by ELTIFs for financing from the EIB.
Guidelines on how on this financial will be channelled via the ELTIF are expected to be published in coming months.
The European Parliament stated that "ELTIFs, on account of their portfolio profile and their focus on categories of long-term assets, are designed to channel private savings toward the European economy. ELTIFs are also conceived as an investment vehicle through which the EIB Group can channel its European infrastructure or SME financing. By virtue of this Regulation, ELTIFs are structured as a pooled investment vehicle that responds to the EIB Group's focus on contributing to a balanced and steady development of an internal market for long-term investments in the interest of the Union. Given their focus on categories of long-term assets, ELTIFs can fulfil their designated role as a priority tool to accomplish the Commission’s ‘Investment Plan for Europe’" published on 26 November 2014.
What is the ELTIF?
The ELTIF is a new European 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. The ELTIF will be available from 9 December 2015.
Who qualifies for investment by an ELTIF?
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.
Who are the likely investors in the ELTIF?
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 Bank Group.
Potential market for ELTIF investments
The European Commission estimates 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.