Launched in 2015, the European Long-Term Investment Fund (ELTIF) was created to provide long-term financing in the real economy. The framework gives the fund management industry a channel to market private equity, private debt, infrastructure and real estate to both professional and retail investors – as defined under the Markets in Financial Instruments Directive – across the EU.
Take-up, however, has been less than anticipated due to constraints in the distribution process and stringent rules on portfolio composition, according to the European Council. There were 84 registered ELTIFs as of early January, with most concentrated in only a handful of member states, per the European Securities and Markets Authority. That is set to change with proposed amendments to the regulation, which aim to make it more appealing to retail investors.
“What’s actually changed in the past 12-15 months outside of the ELTIF regulation itself is the market dynamics,” Tarun Nagpal, founder and chief executive of alternatives technology platform S64, tells Private Equity International. He adds that the retail allocation thematic has reached a point of real significance with intermediaries, private banks and distributors.
“Appetite for private equity is expanding from the traditional remit of the large private wealth banks to the regional and mid-tier banks in Europe whose client base is largely classified within the retail regulatory segment. These banks are embracing and participating in private equity, and the ELTIF is one of the key ways they do this because of the ease of distribution and ease of access.”
S64, which counts AltamarCAM Partners as one of its backers, offers ELTIFs, UK Long-Term Asset Funds and open-end semi-liquid retail products. Since its inception in 2020, S64 has launched – and is imminently bringing to market – five ELTIFs, and also has a pipeline of around five more to be launched in 2023 with premier GPs across private equity, real estate, private credit and infrastructure, says Nagpal. Some of the vehicles are expected to raise between €500 million and €1 billion each.
Partners Group, a pioneer in the ELTIF space, launched its first Direct Equity ELTIF at the end of 2016. Participating in the ELTIF market since it was created was eye-opening, says Markus Pimpl, managing director, private wealth, Europe and Asia. He says education was a big hurdle, because it was the first time there was a private markets programme with institutional content that was sold to retail investors. This remains a challenge today in Europe, he says, as the culture of investing in private markets from a private wealth perspective is still developing.
In the know
Adviser education is crucial, says West Lockhart, head of wealth and family offices for BlackRock Alternatives Specialists EMEA, adding that the firm spends a great deal of time working on training materials to help advisers understand how an ELTIF works and how to position this with clients.
“The first thing advisers and clients want to understand is, ‘Will I have liquidity?’ This is a very key question that often comes up,” Lockhart says. “Others are, ‘What is the term of the fund… How long am I invested for? What are the fees associated with that? How long is the investment period for that fund? What are the expected returns?’”
BlackRock has raised close to €1 billion across two ELTIFs in private equity and infrastructure. The vehicles have a minimum investment of €125,000. It plans to bring two more private equity ELTIFs to market this year, which will have a much lower threshold of €30,000, Lockhart tells PEI.
“We’re going to also launch a fully funded strategy, meaning it will have a single capital call, because we really see the market divided into two parts,” he says. “One part of the market wants the closed-end structure, they can handle capital calls, and don’t want any cash drag. The other part of the market cares more about simplicity, access and ultimately can’t manage those capital calls efficiently.”
Barriers to entry
If the ELTIF is as efficient and accessible as it claims to be, why haven’t more GPs marketed such vehicles?
Among the limitations of the ELTIF framework are the minimum investment amounts – the €10,000 entry ticket and 10 percent aggregate threshold – as well as the eligibility of investment assets and the scale of borrowing.
According to Lockhart, the existing ELTIF has certain content requirements in terms of how much of the portfolio has to be invested in European assets. “You’re also not allowed today to invest into funds – only direct deals or co-investments. That means in order to launch a fund like this, you have to have the ability to source attractive deals at attractive multiples, so you can build a diversified portfolio.”
Apart from these constraints and the lack of investor and adviser education on private markets, ELTIF participants note that fund operations is an issue. While interest in the vehicle is high, most private banks are not equipped to feed a private market fund into an ecosystem designed for public markets, according to Pimpl. “This is a bottleneck – the problem is onboarding distribution partners. Their core systems are not yet designed for private markets.” He also adds that there aren’t many asset managers in Europe that are either capable or willing to offer ELTIFs under the current regime, resulting in a very limited product universe.
As such, GPs have had to partner with tech platforms that have the back-office capabilities and infrastructure in place to handle, for example, hundreds of clients, in order for a mid-sized bank to invest in any given fund.
Path forward: ELTIF 2.0
While the industry is abuzz with the reforms proposed for ELTIF 2.0, participants note the need to strike the right balance between flexibility and investor protection.
Pimpl says that, for him, ELTIF 2.0 is a dilution of the “excellent protection mechanisms” of its predecessor. “The last thing our industry needs is to roll out a product that is sold to retirees, for example, and they lose their money. We need to be very careful that what we offer is high quality because we have a fiduciary duty as asset managers to protect the interests of all our clients.
“While the new ELTIF regime has been developed to entice more managers to engage with ELTIFs, this might lead to a massive dilution of the regulatory elements that protect investors – sadly, quantity typically harms quality.”
Some are also excited about the investment opportunities brought about by the intersection of sustainability and impact using the ELTIF. Nagpal says a number of ELTIFs that S64 is doing are directly related to climate, impact investing and sustainable credit.
“One of the drivers of the ELTIF is around infrastructure investments in Europe and providing an additional means to attract private investment,” Nagpal says. “[This may help to] solve this huge paradigm shift of capital that is needed for [the] transition to renewable energy, electrification and sustainable food production.”