Ireland is ELTIF 2.0 ready

On 11 March 2024, the Central Bank of Ireland (the Central Bank) published a Feedback Statement to its consultation paper CP 155 (the CP), as well as an update to its AIF Rulebook, containing a new Chapter 6 (the ELTIF Chapter) on European Long Term Investment Funds (ELTIFs).

The ELTIF Chapter sets down rules which ensure that Ireland is ready for the new, revised ELTIF 2.0 – it should be noted that the delayed Level 2 measures for ELTIFs were adopted (in amended form) by the European Commission on the same day as the Central Bank published its documents.

Background

The EU’s ELTIF Regulation established a new type of Alternative Investment Fund (AIF), designed to be accessible to retail investors while, at the same time, allowing investment in longer-term and illiquid assets, such as infrastructure projects, real estate and listed and unlisted SMEs.

Following low take up of ELTIFs from their establishment in 2015, a review by the European Commission resulted in a number of significant changes being made to the Regulation - these went live in January 2024, as we reported at the time.

In November 2023, the Central Bank published the CP, in which it proposed to introduce a new chapter for ELTIFs in its AIF Rulebook, supporting the domestic implementation of the ELTIF Regulation and setting out an authorisation process for ELTIFs in Ireland. Our summary of the CP can be found here.

The two responses received were largely supportive of the CP’s contents and the Central Bank has now published a Feedback Statement, in which it considers the comments made and explains where these have resulted in changes to its original proposals

What changes is the Central Bank making to its original proposals?

Taking each section of the ELTIF Chapter in turn, the Feedback Statement sets out a number of areas where it has changed aspects of its original proposals in light of the responses received.

Section I: ELTIF restrictions

• General restrictions

The proposed restriction on an ELTIF acquiring shares from carrying voting rights enabling it to exercise significant influence over an issuing body has been removed from the final ELTIF Chapter as it was felt that it does not take full account of the concentration and diversification limits that can be disapplied for professional-only ELTIFs.

• ELTIFs investing in venture capital, development capital or private equity

The CP proposed that rules for ELTIFs investing in venture capital, development capital and private equity would not apply to non-Irish ELTIFs. Since this might create regulatory complexity and an un-level playing field, these provisions have been removed from the final ELTIF Chapter, along with provisions relating to risk disclosures for such ELTIFs.

• Valuation

The Central Bank has determined that, subject to certain requirements, the ELTIF Regulation explicitly permits ELTIFs to issue units other than at NAV and has removed requirements to calculate NAV per share. At the same time, it has incorporated the share class requirements set out in the Central Bank’s guidance on Share class features of closed-ended QIAIFs (the QIAIFs Guidance) as it feels that “these provisions are more appropriate to the structuring and operationalisation of an ELTIF”.

• Umbrella structures

In light of comments in favour of establishing dual-authorised ELTIF sub-funds within a RIAIF or QIAIF umbrella fund and allowing an AIF authorised as an ELTIF QIAIF to make use of the 24-hour fast-track approval process currently available to Irish QIAIFs, the Central Bank has included provisions to allow the authorisation of ELTIF sub-funds under umbrella AIFs.
This will offer Irish ELTIFs the possibility to establish under a new umbrella or an existing umbrella and realise the benefits and efficiencies of such structures.

The Central Bank has provided definitions for three categories of ELTIF, (i) Professional Investor ELTIFs, (ii) Qualified Investor ELTIFs and (iii) Retail Investor ELTIFs.

Where a Qualified Investor ELTIF meets the relevant criteria in the ELTIF Chapter and has a minimum subscription of €100,000, it can make use of the Central Bank’s 24-hour approval process for QIAIFs.

• Distinction between closed-ended ELTIF and those which are open-ended with limited liquidity

To provide clarity, the Central Bank has included new provisions setting out the distinction between, and determination of closed-ended ELTIFs and those that are open-ended with limited liquidity.

• Investment through subsidiary companies

The Central Bank removed requirements in relation to investment through subsidiaries throughout the ELTIF chapter as respondents noted that the ELTIF Regulation directly provides for investment through intermediate holding entities by an ELTIF

• Side-pocket share classes

The Central Bank has extended the requirements in relation to the establishment of side-pocket share classes for assets that become illiquid or difficult to value to include assets that may become impaired. ELTIFs will be able to create side-pocket share classes in exceptional circumstances where their assets become impaired or can otherwise no longer be held in the ELTIF’s portfolio.

Section II: Supervisory requirements

• Offer period

Feedback noted that there should be provision for differing approaches to subscriptions, given that ELTIFs can invest in a broad range of asset classes and different investment strategies, with closed-ended or certain open-ended ELTIFs with limited liquidity having greater flexibility as to the length of the initial offer period.

The Central Bank has removed provisions relating to offer periods and this change is reflected through the incorporation, within the ELTIF Chapter, of the QIAIFs Guidance.

• Directors of ELTIF investment companies

Taking account of feedback received, the final ELTIF Chapter has been amended to require an ELTIF (at Board or Chair level) to form a view as to the impact of the resignation of a director on the ELTIF itself, having regard to the current and prospective financial state of the ELTIF as well as any other relevant factors that should be taken into account arising from the resignation.

• Replacement of AIFM, management company, general partner or third party

The Central Bank agreed that removing the proposed deadline for notifying the Central Bank of the replacement of the AIFM, management company, general partner or third party would be proportionate as ELTIFs are, in any event, required to notify and/or seek the approval of the Central Bank in advance of any proposal to replace the AIFM, management company, general partner or third party.

• ELTIFs acquiring real estate

The Central Bank has removed its proposals relating to ELTIFs acquiring real estate from its final ELTIF Chapter since valuation requirements for ELTIF investments are already included in the AIFMD.

Section III: Prospectus requirements

• General requirements

The Central Bank rejected the view that ELTIFs that are listed and traded on an EU regulated market should not be required to keep their prospectus up to date unless required to do so by other regulation applicable to such entities as it felt that this so may disadvantage investors.

• Material changes to the ELTIF

The ELTIF chapter has been amended to specify that an ELTIF may only change its investment objectives, or effect a material change to its investment policies, with the approval of at least 75% of votes cast at a general meeting. Unitholders must be given a reasonable notice period to enable them to redeem units ahead of such changes being implemented.

• Dealing

The Central Bank has removed provisions relating to redemption in specie as requirements related to redemption payments are provided for in the ELTIF Regulation.

• Risk disclosures

The Central Bank has removed the requirement whereby an ELTIF that invests in emerging stock exchanges and markets must include a recommendation in its prospectus for investors not to invest a substantial proportion of their investment in the ELTIF’s portfolio. The Central Bank’s view is that existing ELTIF requirements already specify that investment in an ELTIF should form a small part of an investor’s portfolio and such investments are subject to the MiFID suitability test.

• Warehousing

As it duplicated provisions already set down in AIFMD, the disclosure requirement in relation to warehousing has been amended to remove the requirement for an ELTIF to pay no more than current market value for the assets. However, such arrangements must still be disclosed to investors along with any associated costs or fees.

• Distributions out of capital and charging fees and expenses to capital

The Central Bank has removed the requirements related to distributions out of capital since these are addressed by the distribution requirements set out in the ELTIF Regulation.
It has, though, retained limited prospectus disclosure requirements in relation to the charging of fees and expenses to capital to ensure that investors are aware of what fees and expenses may be charged to capital, so investors clearly understand how they may affect their investment.

Section IV: General operational requirements

• Dealing

The Central Bank has removed the provisions (a) limiting an ELTIF to retaining 10% or less of redemption proceeds and (b) prohibiting the issuing of units unless the equivalent of issue price is paid into the ELTIF’s assets, to ensure alignment with the redemption requirements set out in the ELTIF Regulation.

• Distributions out of and charging of fees and expenses to capital

The Central Bank has removed requirements in relation to distributions out of capital as these are not included in the ELTIF Regulation.

Section V: Annual and half-yearly reports

• Annual and half-yearly reports

In response to feedback (a) requesting that there be no differentiation between the accounts requirements for ELTIFs depending on structure (except that an ICAV can produce accounts per sub-fund) and (b) noting that ICAVs are not subject to the statutory investment risk-spreading requirement, so this provision should exempt ELTIF ICAVs, the Central Bank has amended the provisions in the ELTIF Chapter to account for the different requirements for ICAVs.

Section VI: Marketing of ELTIF to retail investors

• Marketing of ELTIFs to retail investors

The Central Bank has removed Part II of the ELTIF Chapter (‘Marketing of ELTIF to retail investors’) as the cross-border requirements within the ELTIF Regulation will apply.