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ELTIF review - What is needed to make ELTIF 2.0 successful?

EU Fund regulation | ELTIF
25 February 2022 | Policy position
EU Fund regulation

EFAMA strongly supports the Commission's draft proposal amending the ELTIF Regulation where it addresses some of the major obstacles that have undermined the attractiveness of the ELTIF product since inception. The revised legal framework has the potential to transform ELTIF into a product of choice for a larger (retail) investor audience, all while serving the purposes of the Capital Markets Union (CMU). However, some important adjustments remain to be made for the ELTIF regime to reach its full potential as a competitive long-term investment option.

- The ELTIF draft proposal successfully removes the unnecessary barriers that have limited retail investors' access to long-term investment opportunities, while preserving a sound investor protection framework that prevents retail investors from being exposed to excessive risks. To strike the right balance between flexible product rules and investor protection, the draft proposal:

• Removes the minimum investment amounts (i.e. the EUR 10.000 entry ticket and 10% aggregate threshold), while introducing an important alignment to the suitability test as defined by Article 25 of MiFID II. Such changes eliminate unjustified barriers that have prevented retail investors from having access to ELTIFs and overcomplicated the distribution process while ensuring legal certainty by providing a level playing field for distributors when applying the suitability test to a potential retail client; and

•  Safeguards important investor protection requirements that ensure that retail investors are exposed to a safe product. More specifically, a retail audience benefits from detailed and complete information via the AIFMD transparency requirements, including a prospectus, a KID, as well as periodical reports. Greater certainty for distributors at the point of sale is ensured by the cross-reference to the established suitability test under Article 25 of MiFID II, as complemented by the possibility for investors to withdraw from the investment agreement, redeem or transfer their units/shares, or raise complaints should they have concerns about actions taken by the ELTIF manager.


- The European Commission's draft proposal promises to improve ELTIF's attractiveness by:

• Broadening the scope of the current eligible asset universe, thus allowing for more diverse investment opportunities, including fund-of-funds investment strategies, real assets, financial assets, increasing the minimum capitalisation (up to EUR 1 billion) for qualified portfolio undertakings to be investable, and lowering the restrictions on real asset holdings to EUR 1 million;

• Reducing the threshold of eligible investment assets to 60% of the ELTIF capital, thus enabling managers to opt for slightly more liquid portfolios (to meet retail clients' possible liquidity preferences);

• Removing the unnecessary barriers to retail investors while cross-referencing the suitability test requirement under MiFID II (Article 25); and
• Adopting adequate diversification and concentration limits which improve the liquidity profile of the ELTIF's underlying portfolio and promote the flexibility of asset managers when executing their investment strategies, while also increasing the threshold for borrowing cash.

- For a successful take-up of ELTIF in the future, its chances would increase if the following aspects were considered:

• Further clarifications (to also assist the future work of ESMA) are needed regarding the operational complexities for the proposed "Liquidity Window Mechanism", intended to allow investors to redeem their units during the life of an ELTIF;

• To not materially alter the portfolio composition and investment strategies of existing ELTIFs, as well as on legal certainty grounds, it is crucial to include a grandfathering clause to prevent the new regime from becoming retroactive;

• Securitisations as eligible investment assets remain limited to those conforming to the EU STS regime, thereby excluding a broader universe of national/non-EU ones. This may limit investment opportunities, as well as the diversification of the ELTIF's portfolio;

• The attractiveness of the ELTIF product would benefit from a further increase of the UCITS-eligible asset to 50% of the ELTIF's capital so as to facilitate the management and offer of a slightly more liquid version of an ELTIF product to better meet retail investors' liquidity premium, and;

• Even though the Commission has a limited scope to influence the tax treatment of ELTIF, we nevertheless believe that tax considerations should be addressed, as tax neutrality and tax incentives have proven to be an important obstacle in the take-up of the ELTIF product compared to other investment vehicles.

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