Established in 2015 as a cross-border investment vehicle, the European Long-Term Investment Fund (ELTIF) has proven its ability to support economic growth, job creation, and the development of sustainable projects across the EU.
Since then, the ELTIF has cemented its place as fundamental to the European investment landscape – and with the introduction of an enhanced set of regulations under ‘ELTIF 2.0,’ launched in January this year, today the framework promises new opportunities for professional and retail investors alike. Research from Scope Group forecasts that the market will only increase as a result of the new regulation, having already grown by over 50% in 2022 compared to 2021.
What does the enhanced regulation entail?
The ELTIF framework was originally launched to target institutional and professional investors, directing capital into the financing of EU projects that needed long-term capital, but lacked access to the public capital markets – such as private infrastructure projects, social initiatives and unlisted SMEs (often smaller, family-owned businesses). This framework laid out strict rules regarding the types of assets eligible for investment. Since then, however, the evolving economic landscape has necessitated a re-evaluation of some of these regulations, and on 1st January 2024 new ELTIF regulation came into force, signalling the arrival of so-called ‘ELTIF 2.0.’
Below, we delve into the key changes introduced by the new regulation and explore the implications for both investors and insurers.
- Increased flexibility: With an expanded list of eligible asset classes, investors are now able to access a broader range of assets, including green bonds, minority co-investments and certain types of securitised assets that were previously more restricted. The new regulations also allow for greater investments in more illiquid assets. Such investments are perceived as higher risk by insurers due to potential issues when it comes to redemptions, the potential need for the creation of side pockets and so forth. Consideration also needs to be given to the longer time horizons associated with such investments and ensuring such detail is adequately represented to investors.
- Improved accessibility for retail investors: For investments in real assets, the minimum value threshold of €10m has been removed, allowing a wider audience to participate in long-term investment options. The EU has also introduced new marketing strategies aimed at all types of investors, including retail. While the new rules mean that ELTIFs will be split between those that are available to professional investors only, and those that are available to retail investors, the latter will face additional scrutiny from insurers on consumer duty regulation, and likely pay an increased premium to account for what is perceived as a riskier investor base. Retail investors should be provided with considerable disclaimers, warning that there is no guarantee of any return on their investment. They also need to be aware of the minimum holding period applicable to open-ended structures (and funds in general) which will mean that their capital is tied up for a specific period before it can be redeemed. Redemption conditions need to be monitored so that there is a clear understanding as to when and how capital is returned.
- Stricter transparency and reporting requirements: ELTIF 2.0 brings with it new obligations for fund managers regarding disclosures, particularly in respect to meeting certain sustainability criteria. There are also enhanced measures in place around investor protection. Adaption to these requirements is key to give insurers comfort that there is no increased risk of regulatory investigation.
- Encouraging funds to invest sustainably: The new regulations emphasise the integration of ESG criteria into the investment process, encouraging fund managers to prioritise projects that direct capital towards renewable energy, green infrastructure and other sustainable initiatives. With the above point regarding transparency and reporting standards, this extends to funds being required to report on the environmental impact of their portfolios. We have already seen claims emanating from the US for misrepresentation of ESG related investment (WisdomTree Asset Management being a recent example). Therefore, while this push towards sustainability gives investors access to positive impact investment, the language used in relation to these ESG representations by companies needs to be extremely clear, and reflective of the strategy to align with their expectations.
- Broader range of investment: Under the new rules the legislator has also broadened the list of investment assets eligible for ELTIFs, making it possible for the ELTIF to invest up to 10% in any UCITS assets, offering greater portfolio concentration than the previous 5%.This includes fund of fund investment creating an additional layer of required due diligence, to ensure that the performance of the underlying manager is operating correctly. To avoid a breach of the fund conditions, portfolio parameters need to be consistently monitored.
The role of specialist insurance brokers
The latest regulation brings increased flexibility and accessibility, but it also heightens risk exposure for asset managers, especially given the growing focus on sustainability and reporting.
Insurance can provide asset managers with a secure and comprehensive risk transfer mechanism - not just for their firms, but for themselves personally and against third-party liabilities. The only way to achieve this is by partnering with experienced insurance brokers who dig deeper than traditional metrics like AUM or retail investor percentages, ensuring every aspect of the proposition is covered.
BMS Group ensure that specialism is available to the many and not just the few, providing senior personnel for every client regardless of their profile. If you would like to discuss the above or any other queries, please contact one of the team today.