ELTIF 2.0: Understanding the New Regulatory Technical Standards

What is an ELTIF?

The European Long-Term Investment Funds (“ELTIFs”) were introduced as part of the broader Capital Markets Union (CMU) initiative. The ELTIFs aim to channel capital into long-term investment projects, such as infrastructure, real estate, and small to medium-sized enterprises (SMEs). ELTIFs are governed by Regulation (EU) 2015/760 (the “ELTIF Regulation”).

Recently ELTIFs have undergone an overhaul in the form of the European Long-Term Investment Funds Regulation (EU) 2023/606 (“ELTIF 2.0”). ELTIF 2.0 addresses several supply and demand constraints and clarifies the scope of eligible assets and investments, portfolio composition and diversification requirements, cash borrowing and lending conditions and other fund rules, including sustainability considerations. Ultimately, ELTIF 2.0 aimed to increase the usage of these investment fund structures and recent data has shown a marked increase in the number of ELTIFs since the ELTIF 2.0 reform.

You can read more about ELTIF 2.0 here

The Regulatory Technical Standards (“RTS”) considered in this article are part of the ELTIF 2.0 reform and concern the use of derivatives, an ELTIF’s redemption policy and liquidity management tools, the circumstances for the matching of transfer requests of units or shares of the ELTIF, certain criteria for the disposal of ELTIF assets, and aspects of the costs disclosure.

The key aspects of the RTS are further detailed below.

The ELTIF Regulatory Technical Standards (RTS)

 Use of derivatives

The RTS states that ELTIFs are only permitted to use financial derivative instruments where the use of such instruments solely serves the purpose of hedging the risks inherent to other investments of the ELTIF. In effect, ELTIFs may not use derivatives as a “pure form of investment”.

ELTIF and asset matching

The ELTIF Regulation states that the duration of an ELTIF must align with its long-term investment focus. This means that the ELTIF’s lifespan should be sufficient to encompass the developmental and economic life cycles of its constituent assets.

The RTS expand on this requirement providing that when assessing whether the life of an ELTIF is compatible with its individual assets certain specified considerations should be taken into account such as the liquidity profile of the underlying assets.

Holding periods

The ELTIF Regulation provides that an ELTIF may provide for the possibility of redemptions before the end of the life of the ELTIF. The RTS set out the criteria to be used to determine the minimum holding period.

Information about the redemption policy

The RTS sets out the information to be provided by the manager of an ELTIF to its National Competent Authority if the ELTIF allows for redemption during its lifecycle. This includes features such as the redemption policy and how redemption requests will be met.

Liquidity management tools

The RTS sets out the requirements to be fulfilled by the ELTIF in relation to its redemption policy and liquidity management tools and provides that the manager of an ELTIF may, at its discretion, utilise liquidity management tools and provides, inter alia, the following liquidity management tools:

(a) anti-dilution levies.

(b) swing pricing;

(c) redemption fees.

Liquid assets

The RTS establishes criteria for determining the necessary percentage of liquid assets within an ELTIF. This ensures that the ELTIF maintains sufficient liquidity to meet redemption requests, balancing the long term nature of the investments and a need for short-term liquidity.

Matching of transfer requests

The RTS sets out the policy for matching transfer requests of units or shares of the ELTIF by exiting investors with transfer requests by potential investors if the ELTIF allows for such a possibility.

The RTS also provides for the determination of the execution price and the pro-ratio conditions where transfers are matched as well as the information that ELTIFs need to disclose to investors when transfers are matched.

Essentially the key aspects points of the RTS are the clarification around the use of derivatives, details of liquidity management tools and aspects that are relevant to ELTIFs that will allow redemption during their lifecycle.

Next Steps and How Zeidler Can Assist:

The overhaul of ELTIFs through the ELTIF 2.0 reform and the accompanying Regulatory Technical Standards (RTS) marks a significant step in enhancing the functionality and appeal of these investment vehicles. By addressing previous limitations and clarifying critical regulations, ELTIF 2.0 aims to boost long-term investments across Europe. The emphasis on sustainability, coupled with detailed provisions on the use of derivatives, redemption policies, and liquidity management tools, ensures that ELTIFs are better equipped to meet investor needs while maintaining their long-term investment focus. As the number of ELTIFs continues to rise, these reforms are poised to play a pivotal role in driving capital into essential projects, fostering economic growth and development.

If you have any questions or require support, the Zeidler Legal Team are here to help. Our global team of professionals remains current on the latest legal, regulatory and compliance changes affecting the asset management industry.  If you require additional information or assistance, please get in touch with us.