On 20 March 2023, the revised ELTIF Regulation was published in the EU Official Journal.  The new Regulation introduces more flexibility of the vehicle with respect to eligible assets, portfolio composition, distribution and authorisation, as well as further relaxed requirements for ELTIFs solely marketed to professional investors.  The ambition of the new Regulation is to enhance the attractiveness of ELTIFs as go-to vehicles for investment into infrastructure, real estate and SME financing across Europe. The Regulation will apply from 10 January 2024 onwards.

In March 2023 the ACC published a summary of the new rules that can be found here but key features of the new ELTIF regime include:

• Greater differentiation between the rules for ELTIFs marketed to professional and retail investors, providing for different rules for ELTIFs marketed to retail and institutional clients in the following areas:
  • The diversification and composition of the portfolio;
  • The concentration limits;
  • The borrowing of cash.
• Improved retail distribution possibilities for ELTIF managers.
  • The suitability assessment is now in line with the MiFID II provisions for ELTIF managers and distributors when directly offering or placing ELTIFs.
  • The reforms also remove the minimum entry ticket of €10,000 and the 10% aggregate threshold for retail investors whose financial portfolios do not exceed €500,000.

• Improved investment rules:
  • Reduction in the minimum assets thresholds to 55% (down from 70%), meaning that ELTIFs can now invest up to 45% of capital in UCITS eligible assets.
  • The scope of what is considered an eligible investment has been expanded:
    • It now includes environmentally sustainable loans and STS securitisations.
    • The scope of eligible real assets has been expanded.  Investments are allowed without a minimum investment value.
    • Fund-of-fund investment strategies are now allowed.
    • Eligible assets and investments can be located in third countries, under specific conditions.
    • Investments now allowed in SMEs listed with up to €1.5bn in market capitalisation.
  • Co-investments are now allowed.
  • Clarification around the use of ELTIFs in master-feeder structures.
  • Investments allowed in financial undertakings authorised within five years of the date of the investment.
  • Concentration limits and diversification requirements for ELTIFs marketed to professional investors have been removed.
  • Concentration limits and diversification requirements for ELTIFs marketed to retail investors have been increased.

• Increased cash borrowing limits to 100% of NAV for ELTIFs marketed to professional investors and 50% of NAV for ELTIFs marketed to retail investors.
• Less restrictive approaches to ELTIF form, liquidity profile and redemption policy (with ESMA tasked with developing RTS to provide further guidance on this point);
  • The reforms permit ELTIF managers to include the possibility for redemptions in the rules or instruments of incorporation of the ELTIF, in order to provide extra liquidity to investors.
  • The reforms permit ELTIF managers to include the possibility for redemptions in the rules or instruments of incorporation of the ELTIF, in order to provide extra liquidity to investors.

Regulatory technical standards

The ELTIF Regulation required the European Securities and Markets Authority (ESMA) to submit draft Regulatory Technical Standards (RTS) on areas relating to liquidity management to the European Commission by 9 January 2024.

On 23 May ESMA published a consultation paper on the ELTIF 2.0 RTS in May 2023. The consultation sought views on the following:

• ESMA's guidance to ELTIF managers to evaluate the compatibility of the fund's life cycle with that of its underlying assets.
• ESMA’s criteria for determining the minimum period investors must hold an ELTIF, along with an obligation for managers to justify any deviations from this period.  
• The information ELTIF managers should provide to National Competent Authorities, including details on the redemption policy, balance sheet, valuation procedures, liquidity stress tests, liquidity profiles, and liquidity management tools.
• ESMA’s criteria for developing an effective redemption policy and the requirement for ELTIF managers to adopt at least one anti-dilution liquidity management tool, as well as implement redemption gates.
• The proposed criteria for ELTIF managers to assess the percentage of assets that can be redeemed, thereby establishing a size limit for redemptions.
• The circumstances and process for utilizing the matching mechanism to align redemptions with new investments, including the disclosure obligations for ELTIF managers when employing this mechanism.
• ESMA amendments of the criteria for valuing assets to be divested, specifying a deadline of six months for completing the valuation process after informing the competent authority about the disposal of ELTIF assets.
• The definitions, calculation methodologies, and presentation formats for disclosing various costs associated with ELTIFs, such as setup costs, asset acquisition costs, management and performance fees, distribution costs, and other expenses, along with guidelines on disclosing the overall cost ratio.

AIMA and the ACC responded to the consultation on 24 August 2023.

ESMA submitted the proposed ELTIF RTS in December 2023.  In March 2024, the European Commission responded to ESMA stating that it intends to amend the proposed ELTIF RTS before adopting them.  The key amendments relate to liquidity management requirements and broadly speaking these seek to introduce more flexibility for ELTIF managers than previously provided for under the ESMA RTS. 

In July 2024, the European Commission adopted the RTS, which were were published in the Official Journal of the EU on 25 October.

The Delegated Regulation includes provisions on:

• The use of derivatives for hedging purposes: is allowed if it is economically appropriate and aims at a verifiable reduction of risks, among other considerations.
• Minimum holding period: though not mandatory, ELTIF managers that choose to determine a MHP will have to follow a set of criteria including the liquidity profile of the underlying asset classes, the ELTIFs investment policy and its investor base.
• Information to be provided to NCAs:
  • Open-ended ELTIFs shall provide competent authorities with a variety of information, including the redemption policy, description of LMTs, anti-dilution procedures, and how assets and liabilities will be managed to meet redemption requests.
  • Throughout the life of the ELTIF, competent authorities can request information on the activation and use of LMTs and liquidity stress tests.
• Redemption policy: 
  • The percentage of redeemable assets will be calibrated on the basis of a number of criteria and one of the following           

1. the redemption frequency and the notice period of the ELTIF, as outlined in the three options of Annex I.
2. the redemption frequency and the minimum percentage of liquid assets (UCITS eligible assets), as outlined in Annex II.

• Liquidity management tools: the ELTIF manager will have the option to implement at least one anti-dilution LMT from anti-dilution levies, swing pricing or redemption fees.
• Matching mechanism: the Delegated Regulation follows principles-based approach and outlines the criteria that must be included in the policy for matching requests.
• Costs disclosure: includes common definitions, calculation methodologies and presentation formats of costs.

Please contact Nick Smith if you have any questions regarding the regulation.

• 

  Nicholas Smith

  Managing Director, Private Credit, Alternative Credit Council