The recently redesigned European Long-Term Investment Funds framework ("ELTIF 2.0"), fully applicable since January 2024, is acclaimed as a modern attractive framework for fund managers to provide long-term investment opportunities on a cross border basis to professional and retail investors. The extensive changes introduced by the EU's ELTIF 2.0 Regulation (2023/606/EU) address the deficiencies that afflicted the original ELTIF 1.0 framework with respect to overly strict rules on eligible investments, diversification and access by retail investors, making the revised framework a much more appealing vehicle for managers and investors alike.
Designed to raise and channel capital to long-term investments in the real economy, this new framework focuses on sectors such as energy and transport infrastructure, schools, hospitals, and green and digital transition projects. It lays down uniform rules on the authorization, investment policies and operating conditions of EU AIFs managed by EU alternative investment fund managers (EU AIFMs) that aim to be marketed in the Union as ELTIFs.
The application for authorization is made to the competent authority of the interested AIF, which in Cyprus is the Cyprus Securities and Exchange Commission. The license is granted provided that the AIF meets the requirements of the ELTIF Regulation and the competent authority approves the EU AIFM, the fund rules or instruments of incorporation and the depositary.
□ A much broader range of eligible investments
ELTIF 2.0 considerably expands the range of eligible investments and assets by including "real assets". These encompass immovable property such as communication, environment, energy or transport infrastructure, social infrastructure such as retirement homes, schools, or hospitals, as well as infrastructure for education, health and welfare, industrial facilities and other assets such as intellectual property, vessels, and aircrafts.
It also provides for the possibility, under conditions, of investing in fintechs, as well as in undertakings and infrastructure in third countries, provided the third country is not a high-risk third country or a non-cooperative jurisdiction for tax purposes. As for investing in listed entities, ELTIF 2.0 raises the thresholds, allowing investments in companies with capitalization of up to €1,5 billion (from €0,5 billion). Moreover, it allows investments in simple, transparent and standardized securitisations such as residential or commercial mortgage-backed securities (up to 20% of the fund's capital).
□ Greater Leverage
ELTIF 2.0 raises the borrowing limit to 50% of the fund's net asset value where the fund is marketed to retail investors, and to 100% of NAV when marketed to professional investors. Under the ELTIF 1.0 regime, borrowing was restricted to 30% of the fund's capital.
□ Investment rules and diversification
A key novelty in ELTIF 2.0 is the lowering of the minimum investment in eligible assets from 70% of the fund's capital to 55%. Additionally, the maximum investment in a single asset (i.e a single real asset, or instruments issued by a single undertaking) is raised from 10% to 20% of the fund's capital. This enables the fund to have a smaller portfolio of investments and thus reduce investment-related transaction and administrative costs.
The revamped framework also expands the ability to employ fund of funds strategies by providing that an ELTIF can invest up to 20% of its capital in any single ELTIF, EuVECA, EuSEF, UCITS or EU AIF managed by an EU AIFM. Additionally, it allows master-feeder structures provided that both funds are ELTIFs.
□ Redemption policy and secondary markets
While retaining the possibility for the listing of ELTIFs in regulated markets or MTFs, the revised framework also allows the possibility of redemption of units or shares before the end of the life of the ELTIF subject to rules on minimum holding periods, percentage of permitted redemptions, notice periods, and the existence of liquidity management tools and appropriate redemption policies.
ELTIF 2.0 moreover provides for the possibility of creating a "matching mechanism", i.e, a mechanism for full or partial matching (before the end of the life of the ELTIF) of redemption requests by existing investors with subscription requests by potential investors.
In December 2023, ESMA submitted draft Regulatory Technical Standards (RTS) to the Commission, specifying the rules relating to redemption modalities and the matching mechanism.
□ Improved investor access
A key improvement introduced by the new rules with a view to making ELTIFs accessible to a much broader set of investors is the removal of (i) the €10 000 minimum investment requirement and (ii) the limitation of investing no more than 10% of an investor's portfolio in ELTIFs. Also removed is the requirement that distributors or managers of ELTIFs provide "appropriate investment advice" to retail investors.
Will fund managers and investors embrace ELTIF 2.0?
The significant improvements to the regulatory framework, addressing both supply-side and demand-side problems, are expected to make ELTIFs much more appealing to both fund managers and investors, driving interest for setting up such funds also in Cyprus given its sprawling investment fund ecosystem. Fund-of-funds ELTIFs are likely to draw particular interest as a means for asset managers to offer investors access to their existing AIF funds.
The expanded range of eligible investments, the significant relaxing of the diversification rules and the lowering of the minimum investment amount in eligible assets is generally expected to attract many fund managers to offer ELTIFs, especially given the ability for EU-wide single passport distribution and the much broader investor population that can now be tapped. With ELTIF 2.0, retail and professional investors can invest for the long-run in funds that provide an interesting, stable return or a lump sum at the end while benefiting from harmonized investor protection rules and, in some cases, options for redemption and early exit.
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