European Long Term Investment Fund: A Long-Term Opportunity for Investors

The European Long Term Investment Fund (ELTIF) is a type of investment fund designed to provide long-term investments for European investors.

It allows investors to pool their funds together to invest in a variety of assets, such as infrastructure projects, real estate, and small and medium-sized enterprises (SMEs).

ELTIFs are designed to be a low-risk investment option, with a minimum investment period of five years.

Investors can benefit from diversification, as ELTIFs can invest in a wide range of assets, reducing the risk of losses.

The revised ELTIF has the potential to transform into a product of choice for European investors, becoming a cornerstone of the Capital Markets Union.

Private markets investments offer a chance to diversify portfolios, reducing overall risk exposure across investments, thanks to their low correlation with traditional asset classes.

The revised ELTIF framework aims to make it a competitive long-term investment option, but some important adjustments are still needed to reach its full potential.

Private markets have the potential to increase a portfolio's total return by outperforming their public market equivalents.

Historically, private equity has been able to outperform global equities, with an annualized return of 11.4% for the 20-year period ending March 31, 2022, according to the Burgiss Private Equity Manager Universe.

Private credit has also shown strong performance, with an annualized return of 9.3% compared to US bonds, as measured by the Cliffwater Direct Lending Index over the same period.

Past performance does not guarantee future results, but these figures demonstrate the potential for private markets to enhance a portfolio's return.

Private market manager universes and indices often rely on self-reporting by managers, which can introduce biases such as survivorship bias, where only successful funds are reported.

Despite these limitations, private markets have consistently shown their potential to increase a portfolio's return, making them a valuable consideration for investors.

Diversification is a powerful tool for managing risk in your investments.

By investing in private markets, you can access assets that are not readily available in public markets, such as listed bonds or equities.

These private markets investments have underlying risks that are uncorrelated or less correlated with traditional investments.

This low correlation with traditional asset classes provides an opportunity to reduce overall risk exposure across investments.

EFAMA strongly supports the Commission's draft proposal to amend the ELTIF Regulation, addressing major obstacles that have undermined the attractiveness of the ELTIF product since inception.

The revised framework has the potential to transform ELTIF into a product of choice for a larger investor audience, serving the purposes of the Capital Markets Union (CMU). However, some important adjustments remain to be made for the ELTIF regime to reach its full potential as a competitive long-term investment option.

The European Commission formally adopted its Delegated Regulation supplementing the ELTIF Regulation, which will now be subject to a 3-month scrutiny period by the co-legislators before entering into force.

EFAMA congratulates the Commission on a very robust set of Level 2 rules that will support the revised ELTIF rulebook.

Some important adjustments remain to be made for the ELTIF regime to reach its full potential as a competitive long-term investment option, according to EFAMA.

The regulatory framework for European Long-Term Investment Funds (ELTIFs) has undergone significant changes with the introduction of ELTIF 2.0. To be marketed in the EU, an ELTIF must be in compliance with the Alternative Investment Fund Managers Directive (AIFMD) and the ELTIF Regulation.

ELTIFs must invest at least 55% of their capital in "eligible investment assets" and may not invest more than 20% of their capital in any single asset. Additionally, ELTIFs that are marketed to retail investors may borrow no more than 50% of their respective Net Asset Value (NAV) and must disclose all borrowings.

Here are the key investment rules for ELTIFs:

ELTIF 2.0 regulations and rules are designed to support the growth of the ELTIF product in the EU.

To be marketed in the EU, an ELTIF must be in compliance with the Alternative Investment Fund Managers Directive (AIFMD) and the ELTIF Regulation.

ELTIFs must invest at least 55% of their capital in "eligible investment assets" and may not invest more than 20% of their capital in any single asset.

ELTIFs that are marketed to retail investors may borrow no more than 50% of their respective Net Asset Value (NAV) and must disclose all borrowings.

ELTIFs are prohibited from engaging in short selling, securities lending, securities borrowing, or repo transactions, purchasing commodities, or using derivatives for anything other than hedging.

Here are the key ELTIF 2.0 regulations and rules summarized:

An ELTIF is a regulated investment vehicle that makes long-term investments into private assets. This type of fund was introduced in 2015 to facilitate long-term financing of companies and projects.

ELTIFs are designed to be accessible to all investors, not just high-net-worth and institutional investors. Previously, private investments were only available to these groups due to high minimums and lack of regulation.

ELTIFs have a defined maturity date, typically 8-10 years, making them similar to regular private equity funds. This means investors enter and exit the fund at specific points in time.

One of the main goals of ELTIFs is to provide investors with stable returns from a diversified pool of private investments.

EFAMA has published a report on ELTIF 2.0, highlighting the benefits of the new rules. This publication illustrates the advantages of the updated European Long Term Investment Fund regime.

The report suggests that ELTIF 2.0 will improve the efficiency and effectiveness of long-term investment funds. It also provides a clear overview of the new rules and their implications.

By implementing ELTIF 2.0, investors can expect greater flexibility and a more streamlined investment process. This will make it easier for them to achieve their long-term investment goals.

However, European supervisors' proposed technical standards threaten to undermine the success of the new regime. This could limit the benefits of ELTIF 2.0 and make it harder for investors to access long-term investment opportunities.

The proposed technical standards could lead to increased complexity and administrative burdens for fund managers. This could ultimately harm the development of the ELTIF market.