European Commission adopts proposal to amend ELTIF Regulation

Following its review of the ELTIF Regulation, the European Commission has adopted a legislative proposal (the Proposal) calling for amendments to the ELTIF Regulation.

The Proposal is intended to:

1. broaden the scope of eligible assets and investments;

2. allow more flexible fund rules that include the facilitation of fund-of-fund strategies;

3. reduce the unjustified barriers preventing retail investors from accessing ELTIFs;

4. ease selected fund rules for ELTIFs distributed solely to professional investors; and

5. introduce an optional liquidity window mechanism to provide extra liquidity to ELTIF investors and newly subscribing investors without requiring a drawdown from the capital of ELTIFs.

Why has a proposal been published?

ELTIFs were introduced in December 2015 with the aim of contributing to the EU's real economy by providing "finance of lasting duration" to infrastructure projects, unlisted companies or listed SMEs.

Our summary of the ELTIF Regulation can be found here.

To date, though, the results have been disappointing - only 57 ELTIFs have been registered, all domiciled in only 4 Member States (Luxembourg, France, Italy and Spain).

Article 37 of the ELTIF Regulation requires the Commission to submit a report to European Parliament and to the Council assessing the effectiveness to date of the Regulation.

What did the review cover?

The Commission’s review focused on:

a) the impact of the Regulation’s provisions on the redemption policy and the life span of an ELTIF (Article 18);

b) “the impact on asset diversification of the application of the minimum threshold of 70% of eligible investment assets laid down in Article 13(1)”;

c) the extent to which ELTIFs are marketed in the EU, including whether sub-threshold AIFMs (under Article 3(2) of AIFMD) might have an interest in marketing ELTIFs;

d) “the extent to which the list of eligible assets and investments should be updated, as well as the diversification rules, portfolio composition and limits regarding the borrowing of cash”;

e) whether the ELTIF Regulation has contributed to the completion of the Capital Markets Union (CMU); and

f) whether it has achieved its objective (in Article 1(2)) to ‘raise and channel capital towards European long-term investments in the real economy, in line with the Union objective of smart, sustainable and inclusive growth’.

The Commission’s work has been informed by a number of publications, including:

Final Report of the High-Level Forum on CMU (June 2020)

Among other things, this included recommendations regarding ELTIFs, specifically that

• the Commission should propose targeted amendments and/or new provisions to the ELTIF regulatory framework, such as reducing barriers to investments and broadening the scope of eligible assets and investments; and
• Member States should simplify tax rules applicable to ELTIFs and/or apply preferential tax treatment for ELTIFs.

Commission Inception Impact Assessment (September 2020)

The Assessment noted that preliminary feedback had identified three key areas for improvement:

• on the supply side - improving the fund structuring aspects of the ELTIF framework and considering the existing limitations on what assets ELTIFs can invest in and on how much they can borrow
• on the demand side - removing barriers to investment, such as the requirement for an appropriateness test and an initial investment limit of EUR 10,000; and
• the introduction of tax incentives by Member States to promote investment in ELTIFs.

The Commission confirmed that it would not consider issues concerning tax incentives in the review since these fall outside its mandate under the EU Treaties.

Consultation on ELTIF Regulation review (October 2020 to January 2021)

The Commission’s consultation, the Commission sought views on various issues including:

• the scope of ELTIF authorisation and process;
• the investment universe, eligible assets and qualifying portfolio undertakings;
• types of investors and effective investor protection;
• conflict of interests;
• borrowing of cash and leverage;
• rules on portfolio composition and diversification;
• redemption rules and life of ELTIFs; and
• marketing strategy for ELTIFs and distribution-related aspects.

ESMA’s letter to the Commission (February 2021)

This highlighted the key topics of the ELTIF review that ESMA believed should be considered for amendment, including bringing such funds more into line with the investors’ needs and achieving the right balance between (a) encouraging retail participation and (b) ensuring adequate standards of investor protection.

What happens next?

The European Parliament and Council will go on to review the legislative proposal and agree on a final text. The final legislation will then be published in the Official Journal.

For more information on the ELTIF review, please see our Insights Article here.