On 19 October 2022, a little less than a year after the Commission presented its original proposal to amend the European Long-Term Investment Funds (“ELTIF”) Regulation (“Regulation”) and following a month of negotiations, the European Parliament and the Council, under the Czech presidency, have reached a provisional agreement on the amendments of the Regulation to make these investment funds more attractive. For more context, see our previous Newsflash on what was initially proposed by the Commission and our ELTIF dedicated webpage for more information on the ELTIF investment vehicle.
Background
The modification of the Regulation is part of the EU Capital Markets Union initiative. While the Regulation was adopted six years ago, the market of ELTIFs remains small due to significant supply-side and demand-side constraints . For this reason, the Commission has proposed amending the Regulation to make it more appealing for investors and funds managers. In their agreement, the co-legislators intend to overcome a number of these limitations. They notably clarified the scope of eligible assets and investments, the portfolio composition and diversification requirements, the conditions for borrowing and lending of cash and other fund rules, including sustainability aspects. The proposed amendments also intend to make it simpler for retail investors to invest in ELTIFs while ensuring them a strong protection.
Detailed compromise
Eligible assets
The minimum value threshold for real assets (currently EUR 10M) is removed altogether and the market capitalisation threshold for the investment in listed portfolio undertakings is set at EUR 1.5 bn (instead of EUR 500M currently). Investments in licensed financial undertakings younger than 5 years will now be possible, though some conflict of interests rules will be put in place to prevent ELTIF managers from investing in affiliated entities. Lastly, investments in non-EU AIFs, even if managed by EU AIFMs, will still not be considered as eligible.
Portfolio composition
The minimum eligible assets threshold is set at 55% of the whole portfolio composition (instead of 70% currently), and the individual maximum diversification limit on investments is set at 20%
Fund of funds and master feeder structures
The maximum limit on investments on funds other than ELTIFs and UCITs is increased from 20% to 100%, thus enabling ELTIFs to pursue funds-of-funds investment strategies. However, the maximum individual limit for all types of funds in any other collective investment undertaking remains at 10%.
Open-ended structure of ELTIFs
The European Parliament’s request for explicit references to open-ended ELTIFs was not retained. However, since providing liquidity to retail investors is an important investor protection measure, the Council agreed to amend relevant articles so as to allow investors in ELTIFs to redeem their units or shares before the end of the life-cycle of the fund under certain specific conditions.
ESG ELTIFs
The request by the European Parliament to create an optional sub-category of “ELTIFs marketed as environmentally sustainable” is not retained. However, the Council has accepted to include this topic in the review clause, meaning that the future review of the Regulation will look into the possibility, viability and desirability of such sub-category of ELTIFs.
Next steps
The final text (not published yet) is currently undergoing technical and legal revision. Following that, the finalised text will be submitted for final adoption by the Council and the European Parliament. The new rules should apply nine months after their publication in the EU Official journal.
