ELTIF 2.0: a game-changer for the alternative investments industry?

In January this year, a new version of the European Long-Term Investment Fund (ELTIF) regulation, known as ‘ELTIF 2.0’, became applicable. The aim of this new framework is to boost the take-up of ELTIFs by making them more attractive to investors.

So, what exactly has changed with ELTIF 2.0? And what does the new regulation mean for the industry?

The history of ELTIFs

Before we delve into the details of ELTIF 2.0, let’s take a step back and look at the history of these investments.

ELTIFs are a type of investment fund created by the European Union in 2015. They are designed to help finance the real economy by enabling investors to channel capital into long-term infrastructure projects and small and medium-sized enterprise (SME) financing.

Classified as European Alternative Investment Funds (AIFs), ELTIFs can invest in a wide range of assets, including unlisted companies, real assets such as infrastructure, and private equity funds. However, they are subject to certain rules and regulations designed to protect investors and ensure that funds are used for their intended purpose.

When the EU created ELTIFs, it was hoping to achieve two main goals. First, it wanted to fund the union’s digital, social, and sustainable transition by attracting private investment. Second, it wanted to open up the private markets to retail investors. Previously, these markets were really only accessible to high-net-worth investors with significant capital to deploy.

The challenges with ELTIFs to date

Now, despite initial optimism over the framework, the take-up of ELTIFs has not scaled up as expected. Indeed, at the end of 2022, there was only €11.3 billion in ELTIF structures – a fraction of the amount in European AIFs overall.

What has gone wrong? Well, while market participants have supported the aims of the funds, in practice, certain investment and distribution restrictions have held them back.

Recognising these issues, the European Commission proposed a new, less restrictive version of the ELTIF regulation in November 2021 in an effort to increase the appeal of the funds. This brings us to ELTIF 2.0, which came into force on 9 April 2023 and was applicable from 10 January 2024.

What has changed with ELTIF 2.0?

The ELTIF 2.0 regulation features more relaxed marketing rules for investors as well as more flexible investment rules for managers.

Some of the most fundamental changes are in relation to restrictions on raising capital from retail investors. Under the original ELTIF framework, retail investors were required to make a minimum investment of €10,000 and distributors had to ensure that investors with portfolios worth less than €500,000 did not invest more than 10% of their overall assets in ELTIFs. These requirements have now been removed.

Meanwhile, in the first version of the regulation, distributors and managers were required to set up local facilities agents in each member state where ELTIFs were marketed and carry out suitability assessments for retail investors. These restrictions have also been removed.

Turning to the investment management side, various changes have been introduced to allow more flexibility in asset allocation and structuring options. For example, the minimum investment in eligible assets has been lowered from 70% to 55%, while the maximum investment in a single asset has been raised from 10% to 20%.

The definition of what counts as an eligible asset has also been expanded significantly. Under ELTIF 2.0, eligible assets include FinTech assets, certain securitised assets, and green bonds. As for real assets, which were a key part of the original regulation, the definition of this asset class has been broadened, with the removal of the requirement of economic or social benefit. Fund of funds and minority co-investments are also allowed. There is now also no requirement on the minimum value of real assets. Previously, real assets had to have a value of at least €10 million.

Why ELTIF 2.0 could be a game-changer

While it’s still early days, the new ELTIF regulation could end up being a game-changer for both investors and the alternative investments asset class.

Today, demand for private market investments within the retail investor community is growing rapidly. Like institutional and high-net-worth investors, retail investors are looking to diversify their portfolios away from traditional assets such as stocks and bonds to build more balanced portfolios.

Under the new ELTIF 2.0 framework, it will be much easier for retail investors to gain access to private markets. Going forward, ELTIFs will offer investors the opportunity to invest in this area of the financial markets with relatively small minimum amounts, potentially democratising the asset class.

Ultimately, the new regulation could be a major growth driver for private market investments. As a result of the latest changes, the Alternative Investment Management Association (AIMA) is forecasting €100 billion worth of flows into ELTIFs by 2028.

For more information on the ELTIF 2.0 regulation, or to learn about our range of services for sponsors willing to set-up ELTIF, get in touch with our specialist team. Our team is equipped to drive you through the opportunities and challenges behind setting up such a vehicle both from a regulatory and operational standpoint.