Alternative Investment

What is an ELTIF? – Professional Investor

Private markets have always been challenging for retail investors to access. Investors have been steered away by illiquidity, complex structures, high minimum investing thresholds, and a limited supply of products. However, this is changing.

Even amid market uncertainty following the war in Ukraine and the Covid-19 pandemic, many sophisticated retail investors have showed an increased appetite for private assets. Reasons for that include the need for more diversification, as well as the past outperformance of the sector versus public assets, especially after periods of crisis, and the lower volatility that often comes with private assets.

In 2021, the global value of alternative assets grew by more than $10 trillion, and it is expected to reach $18 trillion by 2026.

In recent years, it’s become easier to access private assets for a wider investor base than just the big institutions, such as pension funds, thanks to regulatory and technology developments. New products have come to the fore, such as European Long-Term Investment Funds (ELTIFs), which we will examine below in more detail.

What is an ELTIF?

An ELTIF is a type of investment fund borne out of regulation introduced by the EU in 2015. The goal of this regulation was to help improve the financing of EU companies and projects that need long-term capital, but don’t have access to the public capital markets. The regulation set out a fund structure that allowed for sophisticated retail investors to access private asset investments, such as infrastructure projects and unlisted small and medium-sized companies which are often family-owned. The aim was to boost the real economy in Europe.

Why now?

This doesn’t mean retail investors were not attracted by private markets before, but the lack of accessible products, high minimum thresholds, complexity, absence of cash flows and illiquidity have always been a major barrier to entry. Hence why institutional investors have tended to be the main investors in such funds.

Over recent years, governments have recognised the growing role of privately-sourced capital for economic growth and job creation. That’s why they introduced regulation to allow retail investors to access private assets.  

In parallel with the changing regulation, fund managers have launched funds that are designed more specifically for retail investors that are simpler to access and administer. For example, structuring funds with a single capital call and having lower minimum subscription amounts. A capital call is when a fund manager calls on the fund’s investors to provide capital in order to make investments and meet obligations of the fund, such as expenses and fees.

Tim Boole, head of product management said:A key attraction of an ELTIF is that it opens up a means to invest in parts of the economy that retail investors haven’t previously been able to access. This is especially relevant for small and medium-sized companies in the EU which are a key source of growth and represent a large part of the economy.

‘Europe has some of the leading specialist companies spanning sectors such as consumer luxury, manufacturing, services and technology. They are highly attractive because they are specialist businesses, but they are often too small to list on a stock exchange. This means they are often unable to fulfil their growth potential due to insufficient new capital. The ELTIF helps change this.’

What are the main features of  an ELTIF?

An ELTIF could become the equivalent of an UCITS fund for illiquid assets. Still, an ELTIF presents particular risks and complexities associated with their closed form and the predominantly illiquid nature of their investments.

The greatest of these is that the structure is illiquid, meaning that investors must plan on holding it for the full term, typically up to about 10 years, although this varies between ELTIFs. The closed-ended structure means the capital is invested early on and then typically investors will receive distributions, which is the return of capital and the performance over the remainder of the term.

The other aspect specific to ELTIFs  is that the investments must be related to the EU economy and they must be direct into a company, so an underlying investment in funds is not permitted. Other rules include the minimum investment amount of €10,000.

It is important to highlight that the ELTIF regulations are under review and certain restrictions may change next year.

What are the key benefits?

There are many factors that make an ELTIF a valuable option for investors looking to diversify into the alternatives space. These include:

  • Performance diversification: opening up a private investor’s portfolio to asset classes that they have not been otherwise able to access.
  • Long-term investment and lower volatility: The longer-term nature of private assets accessed through ELTIFs means they are well-suited to investors with long-term investment horizons and focused more on eventual outcome without picking up on a stock’s volatility.
  • Simpler structure and administration: ELTIFs are structured specifically for private investors, so they are often structured in a way that makes the administration less burdensome. For example, fewer capital calls and shorter duration, and tax reporting designed for individuals. Also, the minimum investment amount is lower than for typical private asset funds.

These plus other factors mean that accessing private assets is no longer beyond the reach of most private investors.

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