European fund industry optimistic that revised ELTIF2 will be a success

Michael Clifford, General Manager of Societe Generale Dublin Branch says: “The original ELTIF1 legislation was sadly not considered a success and not many funds were launched. 

“There is greater optimism that, after wide consultation with the industry, this new version will be more successful as the number of onerous rules – for example on minimum investments levels and borrowing (increased from 30% to 50% for retail funds for example¹) – have been reduced.”

Another attraction of the revised fund structure, Clifford adds, will be the ability to invest in listed fund structures up to €1.5bn, up from a previous limit of €500m under ELTIF1.

When ELTIFs were launched by a variety of companies in the European Union in 2015, SGSS was one of the first companies to service  them and, over the following years, serviced 5 such structures, all of them domiciled in Luxembourg. Thus gaining valuable experience in this area.

SGSS’s ELTIF1 range accounted for a market share in Europe of around 10%, Cumulatively, ELTIF1s pulled in a disappointing €2.4bn Europe wide over the past nine years².

Designed as part of the European Union’s Capital Markets Union push to boost growth by generating more non-bank funding in the bloc’s real economy, the ELITIF can be sold as an Alternative Investment Fund throughout the European Economic Area.

In the first iteration of ELTIF such funds could only be sold to professional investors, but the new version will allow them to also be sold to retail investors. It is, adds Clifford, widely expected that these new retail investors will largely be comprised of high-net worth individuals, family offices and private bank clients.

Another feature of the revised fund is that they can be open as well as close-ended, meaning more liquidity for investors who will no longer have to wait until a portfolio investment is realised to obtain returned capital.

Further flexibility is the ability for the ELTIF2 funds to be set up as master-feeder structures and for cash to be invested in other funds: something that was not possible under ELTIF1.

In addition, Clifford adds, the €10k minimum investment threshold of ELTIF1 has been  removed³

Asset composition has also been made more flexible, with a requirement that only 55% must be in eligible assets, down from 70% under ELTIF1⁴.

Clifford adds that the Central Bank of Ireland, the Irish financial regulator, has been “fully supportive” of the new ELTIF – which will follow an ICAV or ILP structure – having consulted widely with the industry and held workshops with industry players.

The fact that the Irish regulator does not plan to “gold-plate” the regulations should mean that there is healthy demand for Irish domiciled ELTIFs.

“The CBI has indicated strongly that they are not going to gold plate this. They want this to work,” says Clifford.

“ A lot will depend on how ETLTIF2 is implemented, but the mood music from the Irish regulator has been good.”

The CBI plans a 24-hour approval process for funds aimed at professional investors.

SGSS in Ireland will service its first ELTIF2 in Dublin with the next couple of months, with a further three in the pipeline in Luxembourg.

“Europe is looking to make this new fund work and Ireland as a domicile for these funds is crucial for their overall success,” says Clifford.

“Everything has been stacked up to try to make this a success. Some minor fine-tuning might be required over the next year or two but much of the heavy lifting has been done already.”

“My expectation is that ELTIF2 will become the European investment vehicle of choice for long-term investments of around ten years. Especially as managers can avail of the European passport to market their funds across Europe to retail investors and broaden their investor base."

Article initially published by Funds Europe.