Introduction

Recently, the European Long-Term Investment Fund (“ELTIF”) has undergone several changes. The newly-enhanced framework will be attractive to fund managers looking to provide long-term investment options to retail and professional investors alike. In this briefing, we take a look at what this next-generation ELTIF offers, recent developments and the current state of play in Ireland and at EU level.

Evolution of the ELTIF

The ELTIF is a type of EU Alternative Investment Fund (“AIF”) which is managed by an Alternative Investment Fund Manager (“AIFM”). ELTIFs were intended to contribute to financing the European economy by channelling capital towards long term investments, in line with the European Union (“EU”) objective of smart, sustainable, and inclusive growth.

ELTIFs were first introduced in 2015 under Regulation (EU) 2015/760 (the “ELTIF Regulation”) as a new type of regulated investment fund to boost investment in infrastructure, real estate, social projects and private businesses such as small and medium-sized enterprises (“SMEs”). As part of the EU’s Capital Markets Union, ELTIFs were primarily designed as a retail-accessible AIF with the aim of increasing the availability of non-bank financing to the real economy by facilitating investments in more long-term and illiquid assets. A significant advantage of an ELTIF was its ability to market throughout the European Economic Area (“EEA”) on a passported basis to retail investors, unlike other types of AIFs which could only be passported to market to professional investors.

The original 2015 legislation meant that an ELTIF was subject to significant limitations in the type of assets that it could invest in and the diversification requirements which applied. These requirements resulted in a slow uptake of the ELTIF across the EU.

Thankfully, this has now changed and a number of these limitations will be removed. Following a 2020 review of the ELTIF Regulation by the European Commission (the “Commission”), revisions to the ELTIF framework were proposed in 2021 and adopted in 2023 via Regulation (EU) 2023/606 (referred to as “ELTIF 2.0”). ELTIF 2.0 broadened the scope of eligible investments, reduced investment thresholds, and removed unnecessary barriers to participation from retail investors. A summary of the key changes is set out in Annex 1. These more flexible ELTIFs are expected to become far more popular than the predecessor with better protections and diversification rules for those who invest in the product.

Key features

• Focus on the real economy: The ELTIF aligns with the EU’s policy priority of channelling capital towards European long-term investments in the real economy.
• Professional and retail investors: The ELTIF facilitates investment by professional and retail investors in private assets.
• Regulated: The ELTIF is an EU AIF and so in Ireland, it will be authorised by the Central Bank of Ireland (the “Central Bank”) under both applicable domestic investment funds legislation and the ELTIF Regulation. Irish ELTIFs will be subject to the ongoing regulation and supervision of the Central Bank.
• Marketing: As an EU AIF with an EU-authorised AIFM, an Irish ELTIF can be marketed anywhere within the EEA to retail and/or professional investors.

Advantages of an ELTIF

• Professional and retail investors: While ELTIFs have distinct advantages, they have not yet been fully utilised by fund promoters. ELTIFs are suitable for both professional and retail clients, including private wealth investors, providing a relatively safer option for those interested in private market investments compared to other funds.
• Regulated investment vehicles: As ELTIFs are tailored for long-term, illiquid, and real assets, they are well-suited to clients seeking regulated investment vehicles. Unlike other AIFs, ELTIFs can be distributed across the EEA with a passport to both professional and retail investors.
• Closed-ended and limited liquidity options: As ELTIFs focus on long-term growth, they allow for exposure to long-term illiquid assets (to a greater or lesser extent depending on the structure) and are positioned to offer potentially higher returns through exposure to such non-traditional assets.
• Tax efficient: The Irish ELTIF offering allows asset managers to house long-term investments in a range of legal structures which will benefit from favourable tax treatment available to Irish-domiciled regulated funds.

What legal form can an ELTIF take?

An ELTIF established in Ireland can be structured as one of the following:

1. an Irish Collective Asset-management Vehicle (“ICAV”);
2. a public limited company (“PLC”);
3. an investment limited partnership (“ILP”);
4. a unit trust; or
5. a common contractual fund (“CCF”).

ELTIF Investments

• Eligible Investment Assets: The percentage of an ELTIF’s capital that must be invested in eligible assets is now 55%. A list of eligible assets is set out in the ELTIF Regulation and included in Annex 2 (each an “Eligible Investment Asset”). This provides for a broad scope of the real asset investment strategies that ELTIF managers can pursue. The framework ensures that ELTIFs invest in assets with defined characteristics to manage risk and maintain regulatory compliance.
  
  Eligible Investment Assets can include equity, quasi-equity or debt instruments issued by qualifying portfolio undertakings (“QPUs”), loans granted by the ELTIF to QPUs with a maturity matching the ELTIF’s lifespan, and units or shares of other specified investment vehicles, including other ELTIFs.
  
  Real assets, simple, transparent, and standardised securitisations (“STS”), and bonds issued under the EU Green Bond Regulation[1] by QPUs also qualify as Eligible Investment Assets.
  
  A “real asset” means any asset that has an “intrinsic value due to its substance and properties” and may provide returns, including infrastructure and other assets that give rise to economic or social benefit, such as education, counselling, research and development, and including commercial property or housing only where they are integral to, or an ancillary element of, a long-term investment project that contributes to the EU objective of smart, sustainable and inclusive growth.
  
• Other Permitted Assets: An ELTIF may also invest up to 45% of its assets in assets which qualify as eligible assets under the UCITS regime (broadly speaking, liquid transferable securities and money market instruments and related derivative instruments).
  
• Fund of Funds: ELTIFs may be set up as a ‘Fund of Funds’, meaning ELTIFs can invest in other EU AIFs managed by EU AIFMs.
  
• Feeder Funds: It is possible to establish a master-feeder ELTIF where the feeder ELTIF invests at least 85% of its assets in the master ELTIF.
  
• Non-EU assets: An ELTIF may also invest in non-EU assets on the condition that the assets are not in a high-risk money laundering or uncooperative tax jurisdiction.

Borrowing

An ELTIF may borrow cash where such borrowing fulfils all of the following conditions:

• it represents no more than 50% of the net asset value of the ELTIF in the case of ELTIFs that can be marketed to retail investors, and no more than 100% of the net asset value of the ELTIF in the case of ELTIFs marketed solely to professional investors;
• it serves the purpose of making investments (provided that the ELTIF’s holdings in cash or cash equivalent are not sufficient to make the investment concerned) or providing liquidity, including to pay costs and expenses;
• it is contracted in the same currency as the assets to be acquired with the borrowed cash, or in another currency where currency exposure has been appropriately hedged; and
• it has a maturity no longer than the life of the ELTIF.

Borrowing arrangements fully covered by the ELTIF’s investors’ capital commitments (commonly known as subscription line financing) are excluded from the above borrowing limits.

Lifespan of an ELTIF

The lifespan of an ELTIF must be consistent with the long-term nature of the ELTIF and be long enough to cover both:

• the life cycle of its assets, measured by the economic life cycle and illiquidity profile of the assets concerned; and
• the stated investment objective of the ELTIF.

Redemption and Distribution Arrangements

ELTIFs are generally structured as closed-ended funds and therefore have a limited duration. However, ELTIFs may offer redemption facilities (limited liquidity) provided they are clearly set out in the redemption policy. The ELTIF’s prospectus or constitutional document must specify the date of the end of life of the ELTIF and may provide for the right to extend temporarily the life of the ELTIF.

ELTIFs can offer early redemption rights to its investors under certain conditions. For example, redemptions may not be granted before the end of a minimum holding period. The manager of the ELTIF must be able to demonstrate that the ELTIF has in place an appropriate redemption policy and liquidity management tools that are compatible with the long-term investment strategy of the ELTIF. In addition, the overall amount of redemptions must be limited to a percentage of the ELTIF’s investments which qualify as eligible assets under the UCITS regime. If redemption requests exceed this limit, then redemptions will be granted on a pro rata basis.

The ELTIF may distribute to investors any proceeds that are generated by its assets unless the proceeds are required for future commitments of the ELTIF.

Central Bank Authorisation

In light of the changes made at a European level through ELTIF 2.0, which is directly applicable in all EU Member States, the Central Bank carried out an assessment of the national framework for ELTIFs in Ireland and identified the need for a standalone chapter in the Central Bank’s AIF Rulebook that would support its implementation in Ireland. Consultation Paper 155 (“CP155”) was published in November 2023 and in March 2024, the Central Bank responded to the industry’s feedback.

The Central Bank has avoided adding additional requirements to those laid down in the ELTIF Regulation and accordingly, the rules, including those on eligible assets, portfolio composition and diversification, that apply to Irish ELTIFs are as set down in the ELTIF Regulation and related technical standards.

The ELTIF chapter was added to the AIF Rulebook in March 2024 and includes requirements related to ELTIF-specific restrictions, supervisory, prospectus and general operational requirements, and annual and half-yearly reporting. Specific Central Bank ELTIF application forms are available and the Central Bank is now accepting applications for authorisation of Irish ELTIFs.

In terms of the structure and authorisation of Irish ELTIFs, the Central Bank has confirmed that:

• there are three categories of ELTIF available: (a) Professional Investor ELTIFs, (b) Qualified Investor ELTIFs, and (c) Retail Investor ELTIFs;
• an Irish ELTIF may be established within an existing or new Qualifying Investor AIF (“QIAIF”) or Retail Investor AIF (“RIAIF”) umbrella structure, subject to satisfying certain conditions;
• Professional Investor ELTIFs and Qualified Investor ELTIFs, where the relevant provisions of the AIF Rulebook are complied with, can avail of the Central Bank’s 24-hour approval process, under which such ELTIFs can be authorised by the Central Bank within 24 hours of filing the appropriate documentation; and
• Qualified Investor ELTIFs must comply with all of the provisions applicable to ELTIFs marketed to retail investors, notwithstanding that such funds can avail of the Central Bank’s 24-hour approval process.

European Developments

The European Securities and Markets Agency (“ESMA”) was requested to develop regulatory technical standards (“RTS”) under ELTIF 2.0 to specify further details on redemptions and liquidity management and other matters, including costs disclosure. In May 2023, ESMA published a consultation paper on the proposed RTS and on 19 December 2023, ESMA published a final report (the “Final Report”) setting out its proposed RTS reflecting the feedback received in response to its consultation.

In March 2024 the Commission wrote to ESMA to advise that, while recognising that the ELTIF 2.0 provides for flexibility to ELTIF managers to pursue a broad range of investment strategies and objectives – in particular as regards their portfolio composition – the Commission believed that ESMA’s draft RTS did not sufficiently cater for the individual characteristics of different ELTIFs.

In April 2024 ESMA responded and suggested making limited changes to the RTS to strike a balance between protecting retail investors and supporting the capital market union objectives. On the request to calibrate the redemption notice period for an ELTIF based on the proportion of liquid assets in the fund, ESMA has put forward an option under which, depending on the length of the notice period, ELTIF managers shall hold a minimum percentage of liquid assets, and, at the same time, limits on the maximum amount of liquid assets that can be redeemed would be applied.

Next Steps

The Commission will now consider the revised RTS from ESMA. Once the RTS are adopted, there will be a further scrutiny period, and it is hoped that the clarifying requirements will be applicable from Autumn 2024.

If you require advice or further information on setting up an ELTIF, please contact any member of our team or your usual Arthur Cox contact.

Click to view ANNEX 1 and ANNEX 2.