In our previous alerts ( here and here), we noted critical feedback that the European Commission (Commission) gave to the European Securities and Markets Authority (ESMA) on its December 2023 draft Regulatory Technical Standards (RTS). The RTS deal with liquidity and redemptions and is one of the “Level 2” measures that supplement the revised European Long Term Investment Fund (ELTIF) Regulation known as ELTIF 2.0.
Following further negotiations between the Commission, EU Parliament and EU Council of Ministers, the Commission has now adopted the RTS. The end result is a workable set of Level 2 measures dealing with redemption and liquidity provisions that should better align with market practice for open-ended and evergreen funds and that allow an ELTIF manager more discretion in its liquidity modelling and implementation.
By way of reminder, ELTIFs were introduced in December 2015 with the aim of financing the real economy by channelling non-bank capital to long-term infrastructure projects and SMEs financing. An ELTIF is a type of EU alternative investment fund (AIF) managed by an EU AIF manager. ELTIF 2.0 has been available since 10 January 2024.
Our discussion of the RTS is set out in more detail here. We would highlight three main points on the differences between ESMA's December 2023 draft and the version that the Commission has now endorsed:
- Redemption size limit and notice period to redeem. The final provisions require an ELTIF manager to carefully calibrate an ELTIF's liquidity profile by applying a combination of factors within a pre-defined methodology that it selects. These refer to the minimum percentage of liquid assets held, maximum percentage of liquid assets that can be redeemed and redemption frequency. The measures also allow the notice period for investor redemption requests to be at the manager's discretion rather than prescribed. This change acknowledges that the fixed liquid assets thresholds previously proposed could create a cash drag. It also allows more flexibility for targeted investment strategies with different liquidity profiles, such as infrastructure, real estate and private equity.
- Liquidity management/anti-dilution tools. The less prescriptive approach to liquidity management tools (LMTs) in the final provisions should have the effect that an ELTIF manager's implementation of LMTs is permissive rather than mandated. The AIFMD liquidity risk management requirements will also apply to managers of open-ended ELTIFs - for instance, under AIFMD2 revisions, from April 2026 on the use of redemptions in kind and suspension of redemptions, subscriptions or repurchases as well as for other quantitative and anti-dilution LMTs. The reference, however, to AIFMD2 has been removed as member state implementation is only due to take place in April 2026.
- Changes to information on an ELTIF's redemption policy and LMTs that are to be provided to national competent authorities (NCAs) on authorisation and on an ongoing basis. Under the final provisions, the ELTIF manager has to give written notice at least one month in advance of certain changes to its redemption policy and LMTs, unless after an unforeseeable change beyond the manager's control, where it must give notice immediately afterwards. The NCA will be deemed to have accepted such change after 20 days. This is a stricter approach than that in the original RTS, which was a straightforward notification as soon as reasonably practicable following a material change. The process will now involve proactive management by ELTIF managers when making any adjustments to their polices and procedures on liquidity matters.
The RTS will apply the day after the Delegated Regulation is published in the Official Journal of the EU - likely to be October 2024. It may be that some NCAs allow early adoption in the meantime.
The number of ELTIF launches to date has grown to 126, the vast majority of which are Luxembourg ELTIFs. As mentioned in the European Parliament's Capital Markets Union: Ten Years Later report, the hope is that ELTIF 2.0 will be “more powerful” than the “disappointing impact” of the original adoption of ELTIFs.
This finalised detail on liquidity provisions should make ELTIF 2.0 more attractive, noting that the ELTIF marketing passport covers retail investors as well as professional investors. This gives it a structural advantage over other AIFs, to be weighed alongside the detailed considerations that go with eligibility, diversification and liquidity management for evergreen funds.
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