29 January 2015

ELTIF proposal offers private equity the prospect of accessing retail investors

In the summer of 2013, the European Commission unveiled a proposal for a new type of fund: the European Long Term Investment Fund, or ELTIF. The aim was to create a vehicle that could be easily marketed to both professional and retail investors, facilitating investment by smaller European investors in long-term, illiquid assets. It was potentially an important development for the private equity and venture capital industry, whose funds are not normally accessible to individual retail investors, and one that could open up a new pool of capital.

The Commission's idea was that ELTIFs could, in exchange for more regulation, be marketed to retail investors by managers authorised under the Alternative Investment Fund Managers Directive (AIFMD). These funds could then invest in infrastructure projects, real assets (such as intellectual property, machinery and immovable property but with limits on commcercial property and a ban on commodities), unlisted companies or listed small and medium-sized enterprises, as well as other specified types of investment fund. Since mid-2013, work has been underway to agree the rules governing ELTIFs, and late last year a final text was agreed which paves the way for implementation of the new regime.

Initially, proposed restrictions on structures, redemptions and geographic diversification made it hard to envisage that ELTIFs would be used by private equity and venture capital fund managers. But the European Private Equity & Venture Capital Association (EVCA) worked with policy-makers to identify these issues, and the final proposal now allows partnership structures to be used, does not require liquidity mechanisms unless the manager chooses to offer them, includes more reasonable rules on the timing of divestments, and does not include a requirement to invest a certain percentage of the fund in the EU.  That means that ELTIFs could prove to be very useful for a number of fund managers.

Some limitations do remain: for example, only EU funds managed by EU managers may be used, so vehicles based in the Channel Islands or other non-EU jurisdictions are not permitted. And although managers based outside the EU may in future be able to opt in to AIFMD, this is not currently contemplated for ELTIFs, reflecting their European focus. As well as the investments mentioned above, ELTIFs will be permitted to invest in certain other funds: EuVECAs (the lighter touch regime designed for certain European venture capital funds), other ELTIFs and European Social Entrepreneurship Funds. But their use as funds of funds will be restricted: they won't be able to invest in other AIFs that do not fall into one of these three categories. 

The price for a pan-European passport to market to retail investors is, naturally, increased regulation. The marketing documents will need to comply with the requirements of the Prospectus Directive and be accompanied by a "key information document" as prescribed under the Packaged Retail Investments Products (PRIPS) legislative package. The depositary of the ELTIF will be subject to certain provisions of the pending UCITS V Directive and, if the life of the ELTIF exceeds ten years, an appropriate, written warning must be made to retail investors that the fund may not be suitable for them. The fund manager will also have certain other obligations designed to protect retail investors. 

It is currently expected that interested managers will have to wait until (at least) late 2016 for the opportunity to launch an ELTIF, and it is not clear how many will be tempted to do so.   The additional regulatory requirements already laid out – and the many more to be included in the final regulations – will mean a different approach to fundraising for most managers, and that will put many off.  But the prospect of accessing this large new source of capital will encourage many more to look at ELTIFs very seriously.

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