Eltifs: Are private equity and property going retail?
It is estimated that Europe needs €1,500-2,000bn to finance its required infrastructure projects through to 2020.
However, the financial crisis and slower European growth rates have reduced the ability of traditional lenders to finance the required investment. As a consequence, the European Commission is looking for alternative financing and in June 2014, proposed a new investment fund framework designed for investors who want to put money into companies and projects for the long term.
The new structure – known as European Long Term Investment Funds (Eltifs) – was approved by The European Council and Parliament in April 2015 and came into force at the beginning of December 2015.
It is available to all types of investor across Europe, subject to certain requirements set out in EU law.
Under the proposal, Eltifs, which can be structured in the form of limited partnerships, have to meet a set of common rules:
- They can only invest in unlisted companies, private equity, and ‘real’ assets that require significant up-front capital expenditure (e.g. infrastructure, transport and sustainable energy projects) and intangible assets, such as research and development projects.
- They will have up to five years to invest at least 70% of their capital in these assets with any balance (up to 30%) being invested in assets permitted by the EU’s Undertakings for Collective Investment in Transferrable Securities (Ucits) Directive.
- They can only invest up to 10% in any one investment.
- They must always have a depositary to keep assets safe – and in this case it must be a bank depositary as in the case of Ucits funds.
- They can only use derivatives to manage currency risks in relation to the assets they hold, and not for speculation.
- They must obey limits on the amount they can borrow.
Unlike many other similar investment vehicles, Eltifs:
- Can be marketed to both professional and retail EU investors, although they are subject to a minimum investment of €10,000.
- Retail investors with portfolios of up to €500,000 will not be permitted to invest more than 10% of that portfolio in Eltifs.
- The funds are required to clearly indicate their redemption date in the fund rules and disclose this to investors, so that the investors know they will not be able to cash in their share of the fund before the end of its life. If the lifecycle of the Eltif is longer than 10 years, the fund manager will be required to issue a written alert stating that it may not be suitable for retail investors.
- Eltifs are also subject to the same regulatory regime as alternative investment funds, set out in the EU’s Alternative Investment Fund Managers Directive (AIFMD).
- They must also be both incorporated in the EEA, and managed by an EEA-authorised AIFM.
In a further attempt to make Eltifs attractive to investors, the European Commission has included them in the “lower risk” category for Solvency II capital calculation purposes. This means that Eltifs attract a 39% capital charge, in line with European social and venture capital funds.
Managers who decide to use the ELTIF structure will need to:
- Issue a full prospectus – whether marketing to retail investors or not.
- Issue a key information document (Kid) as required under the regulations relating to packaged retail products and insurance based investment products (Priips),
- Have permission from their regulator under article 6(4) of the AIFMD.
- All retail investors will need to receive investment advice as to “suitability” from either the manager or distributer before they can invest.
- Whilst the funds are likely to have a ten year life it is possible for them to be listed – creating flexibility for investors.
So what will happen? – The Pros and Cons
There is no doubt that there is a great need for private investment into infrastructure across Europe – but are Elfits the solution?
Retail investors have already been investing in liquid infrastructure funds for some time. HICL Infrastructure Company Ltd, which launched in 2006, was the first infrastructure investment company to be listed on the London Stock Exchange and now has a market cap of more than £1.5bn (€2bn). International Public Partnerships, a global infrastructure fund, also launched in 2006 has a market cap of just under £900m (€1.25bn). More recently both InfraRed Capital Partners Limited and Bluefield have successfully raised LSE listed infrastructure funds.
Whilst Eltifs allow retail investors to invest in the sector, the listed fund structure already in existence provides retail investors with a fully liquid investment product. Eltifs, unless they are listed, will not provide “day to day” liquidity and investors will have to be prepared to invest in the fund until its maturity. In addition, Eltifs will have to comply with all aspects of the AIFMD, creating a possible expense disadvantage over other products.
Alternative solutions need to be found for the funding of the infrastructure required across Europe. Eltifs may or may not be the solution.
Giri Girisanthan is group head of Technical, Training and Product Development at Augentius