ELTIF: Progress Towards a New Type of European Retail Fund
Maclay Murray & Spens LLP speaks to Sturgeon Ventures about the Regulation on European Long-term Investment Funds’ (ELTIF’s) progress towards a new type of European retail fund.
Back in June 2013, the European Commission published its proposal for ELTIFs. The Regulation has now been formally adopted, and came into force on the 8th of June this year.
ELTIFs – The Rationale
The ELTIF is designed to fill a perceived gap in the range of funds – namely, a vehicle, available to retail investors, for investments over a long term, with the ability to hold illiquid assets such as unlisted shares, real estate and interests in infrastructure projects. The economic rationale is to make funding available as an alternative to bank finance.
ELTIFs – The European Context
In its Green Paper of February 2015 on Building a Capital Markets Union, the European Commission identified ELTIFs as an initiative to boost long term investment, and noted that they should have particular appeal to investors, such as insurance companies or pension funds, which need steady income streams or long term capital growth. The Commission also invited views on the potential extension to ELTIFs of “advantages” currently available for national regimes. In its recent response, ESMA noted that ELTIFs were restricted in terms of eligible investments, but seemed to be reluctant to contemplate an extension of the scope of investments, particularly in terms of direct loans, for retail funds.
ELTIFs – Features
To qualify as an ELTIF, a fund must satisfy various criteria:
- it must be set up in the EEA
- it must be an AIF, managed by an AIFM
- it must be authorised by a regulator in its home state
- it must meet rules on:
– eligible investments
– marketing material
ELTIFs – Investments
An ELTIF must invest at least 70% of its capital in “eligible investment assets”. These include:
- equity in a “qualifying portfolio undertaking” (“QPU”)
- loan notes of a QPU
- loans to a QPU
- units of other ELTIFs, or European Venture Capital Funds (EuVECAs) or European Social Entrepreneurship Funds (EuSEFs) so long as they have not themselves invested more than 10% in ELTIFs
- real estate, as long as each such asset requires upfront capital expenditure of at least €10m
A QPU must meet a number of criteria:
- it must not be a collective investment undertaking or a “financial undertaking” (a defined term)
- it must be unlisted
- it must be established in an EU member state, or other approved country
The remaining 30% (maximum) of the ELTIFs assets are subject to various limits:
- not more than 10% can be invested in assets issued by one QPU (rising to 20% in some circumstances)
- not more than 10% can be invested in an individual real estate asset (again, this can rise to 20% in some circumstances)
- not more than 10% can be invested in a single ELTIF, EuVECA or EuSEF
- not more than 5% can be invested in UCITS eligible assets issued by a single body
An ELTIF may not use derivatives for investment purposes, though these can be used to hedge currency risks in relation to the underlying investments.
ELTIFs – Redemption
An ELTIF must be closed-ended: a date must be specified as its “end of life”, and no redemptions permitted before then.
Units or shares in an ELTIF must be transferable, and may be listed.
Existing investors will have pre-emption rights if shares are to be issued at a discount to NAV.
ELTIFs – Marketing and investors
An ELTIF must produce a Prospectus complying with the Prospectus Directive, and, for retail investors, a KID will be required.
Passporting will be available under the AIFMD notification process.
Retail investors may only invest if they commit a minimum of €10,000. In addition, an ELTIF cannot be marketed to retail investors if it is structured as a partnership.
ELTIFs – Is the structure attractive?
As a closed-ended vehicle, the ELTIF will be competing with some well-established investment structures – the limited partnership, the investment trust, the REIT (for real property) and the VCT (though this is subject to restrictions on the type of investments it can hold). A limited partnership is a popular vehicle for structures involving institutional investors, and given the LP’s tax transparent nature, it is hard to see what the ELTIF adds. For retail investors, the investment trust, as a vehicle, will necessarily involve a listing, whereas this appears to be optional for an ELTIF. A listing may add to the cost of establishing and running the vehicle, but will have the significant attraction of providing investors with liquidity before the winding-up date. Importantly, the tax status of ELTIFs does not appear yet to have been determined for UK purposes – and until this has been clarified, it is too early to decide how attractive a vehicle it will be. For the tax policy-makers, there will be a challenge in reconciling the tax treatment of assets which frequently receive favourable treatment (such as unlisted shares) with those that do not (in particular, real property).
ELTIFs – Next steps
No statement has yet been made by the UK tax authorities regarding the treatment of these vehicles. It is notable, however, that the UK Government has stated that it strongly supports the ELTIF regime, so one might expect them to address this issue in a positive way. We will issue an update as and when the position becomes clearer.
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