Scope:

The Commission has carried out a comprehensive review of the ELTIF legal framework (e.g. fund rules, marketing rules) in other to assess to what extent the existing rules on ELTIFs have met their principle objectives and whether they have been efficient, effective, coherent, relevant and have provided EU added-value.

It also builds on input from European Securities and Markets Authority (ESMA) on the functioning of the framework.

Evaluation findings:

The evaluation found that the advantages of ELTIFs are diminished by the restrictive fund rules and barriers to entry for retail investors, the combined effect of which reduce the utility, effectiveness and attractiveness of the ELTIF legal framework for managers and investors.

Removing these restrictions should help ELTIF reach their full potential to channel investments to the real economy.

Which objective(s) did the Commission pursue?

This review is aimed at attaining the original objective to channel investment toward long-term investments, such as social and transport infrastructure projects, real estate and SMEs. To this end, the ELTIF Regulation establishes uniform rules on the authorisation, investment policies and operating conditions and marketing of ELTIFs. It thereby enhances cross-border access to long term funding for Europe's real economy. The creation of a European fund with uniform rules and administrative procedures also simplifies the situation with a possible fragmentation and inconsistent requirements across Member States.

The Commission proposal introduces a wide range of improvements to the Regulation designed to make it easier to use for fund managers and more accessible for investors. At the same time, the proposal respects the original principles when the Regulation was first conceived of focussing on long-term investments in the real economy while allowing more flexibility in terms of eligible assets and fund structures. It also maintains investor protection by aligning the marketing of ELTIFs to retail investors with the MiFID II suitability test.

The feedback to the Commission’s public consultation showed clear support for the product and elevated interest of the asset management industry in the ELTIF label.

More specifically, with the ELTIF review, the Commission proposes three key changes:

1. First, to introduce a better distinction between (a) those ELTIFs distributed exclusively to professional (institutional) investors and (b) those ELTIFs that can be marketed to retail investors. This will help easing some fund rules (leverage, diversification, concentration limits) for category (a) ELTIFs, while ensuring an effective retail investor protection for category (b) ELTIFs.

2. Second, it is proposed to tackle barriers for retail investors, i.e. removing a minimum 10,000 euros investment (“entry ticket”) and eliminating a 10% maximum exposure threshold for retail investors. These thresholds have proven to be burdensome, dissuasive, ineffective and partially unenforceable. The removal of these barriers would not compromise the protection of retail investors. As a further safeguard, it is proposed to introduce a cross-reference to MiFID II suitability test (which should also cover an investment advice to retail investors in ELTIFs).

3. Third, to maintain the current status whereby ELTIFs remain closed for the duration of a fund, except in limited circumstances.  It is proposed that ESMA would develop regulatory technical standards to further specify the circumstances for redemptions. In addition, to further help the liquidity it is proposed to introduce an optional “liquidity window” mechanism allowing (but not entitling) investors to redeem their units/shares in ELTIFs with a corresponding outstanding subscription interest. This “liquidity window” redemptions mechanism could facilitate a secondary market in ELTIFs and offer a partial (albeit not a complete) liquidity solution for investors.

The ELTIF proposal also includes other targeted amendments, pertaining to the scope of eligible assets and investments, diversification and portfolio composition, leverage and others. Those amendments are expected to add more flexibility to the investment process.

Estimated savings and benefits

Given that the framework has a voluntary approach (i.e. fund managers would choose whether or not to set-up ELTIF), estimating the scale of uptake ex ante was and continues to be difficult. Costs are conditional on the voluntary decision of fund managers to operate under this label. This decision is directly linked to the choices of fund managers of the interest from both institutional and retail investors. Ultimately, an uptake over the longer term will be determined by sustainable demand from investors. The increased number of investors would allow funds to scale up in size and realise economies of scale. Removing duplicate procedures and inflexible fund rules will also reduce costs for ELTIF managers.

On a general level the following stakeholders would benefit from ELTIF:

- Businesses – ability to get more capital from a wider range of investors than they could before;

- Fund managers - greater harmonisation would reduce costs for fund managers operating cross-border as this removes differences in treatment between different markets;

- Investors large and small – ability to invest into a wider range of (long-term) assets and spreading of their risks.