ELTIF 2.0: Ireland to be "ELTIF-Ready"

The countdown to the application of the enhanced European Long Term Investment Fund ("ELTIF 2.0") has begun and interest continues to build. Aaron Mulcahy and Aoife McDonagh from Maples Group highlight developments in Ireland’s efforts to become a core jurisdiction for the establishment of ELTIFs.

Policymakers see the potential of ELTIF 2.0 to facilitate long-term investments, including in energy, transport and social infrastructure and to contribute to the achievement of the European Green Deal objectives. Fund managers see its potential to expand their investor base and tap into retail capital. Retail investors see it as an opportunity to gain exposure to strategies historically reserved for institutional investors which can provide portfolio diversification and attractive returns with some liquidity.

The market for ELTIFs is still in its infancy and unlocking the ELTIF's potential is a key priority area for the Irish funds industry. The publication of the CBI's Consultation on ELTIF chapter in the AIF Rulebook ("CP155") marks a clear intention for Ireland to be "ELTIF ready" and is a key step towards Ireland being considered as a core jurisdiction for the establishment of ELTIFs.

What is the ELTIF?

The ELTIF is a regulated fund product regime, introduced in 2015 and available to European Economic Area ("EEA") alternative investment funds ("AIFs") with an EEA alternative investment fund manager ("AIFM"). Only AIFs that opt-into the product regime and are authorised under the ELTIF regulation can use the term "ELTIF" or "European Long Term Investment Fund" in their name, a label that is expected to gain broad market recognition (like the UCITS label) over time as the product becomes more popular.

The ELTIF is designed to provide long-term stable returns by investing primarily in long-term assets. The ELTIF regulation prescribes what assets are eligible for investment and how investments need to be diversified. Eligible long-term asset classes include private equity, infrastructure, real estate and other real assets. The ELTIF can lend to (as original lender or otherwise) and invest in equities and debt securities of certain qualifying portfolio undertakings and can invest in eligible collective investment schemes. The ELTIF regulation prescribes how much an ELTIF can borrow and in what circumstances. It also addresses the authorisation and supervision of ELTIFs, the marketing of ELTIFs, investor protection and transparency and investor redemptions.

By opting into this regime, ELTIFs can be marketed to institutional and retail investors on a pan-EEA basis, discussed further below.

ELTIF 2.0 Enhancements

Despite this promising framework, ELTIF 1.0 was not seen to work for investors or managers and was underutilised. This led to an intensive revision process that has resulted in ELTIF 2.0.

ELTIF 2.0 broadens the scope of eligible assets and permissible investments and managers will be able to invest in a broader range of real assets. It also expands the scope for investment in other funds to include UCITS funds and EU AIFs with an EU AIFM and allows for master feeder ELTIFs. This expansion will allow for more effective fund of fund strategies, faster deployment of capital and for reinvestment of excess cash into a broader range of funds to mitigate cash drag. The portfolio composition and diversification rules will be relaxed, allowing for more investment in large scale projects.

ELTIFs will also be able to borrow more in order to pursue investment strategies in real assets where using higher levels of leverage is an industry norm or is otherwise required to achieve attractive risk-adjusted returns. At an investor level, ELTIF 2.0 upgrades and enhances the marketing and distribution rules and ability to offer investors redemptions during the life of the fund. It also recognises that retail investors and institutional investors have different time horizons, risk tolerances, investment needs and capabilities to analyse investment opportunities and provide for the relaxation of certain rules where the ELTIF is offered solely to professional investors.

Semi-Liquid Evergreen ELTIFs

One of the key ELTIF 2.0 enhancements is the ability to offer redemptions during the life of the ELTIF without the risk of having to wind-up the ELTIF if the redemption cannot be satisfied within a mandated time period. To complement this greater flexibility, the mandated minimum investment in certain long-term eligible assets will be reduced from 70% to 55%, enabling ELTIF managers to better manage the liquidity of the ELTIF and meet redemption requests, through investment in UCITS eligible assets.

This greater flexibility will allow managers to establish their ELTIFs as semi-liquid evergreen funds, which combine elements of open-ended and closed-ended funds. Such ELTIFs will typically have a long duration and allow subscriptions on an ongoing basis and redemptions on a periodic basis, subject to certain conditions and availability of liquid assets.  

The ability to offer a semi-liquid evergreen ELTIF arrives at the same time as a broader trend for some liquidity in private credit strategies has become established. This has resulted in managers developing a track record of constructing portfolios with sufficient liquidity and building the operational capabilities to offer periodic redemptions. This experience which will be essential for semi-liquid ELTIFs as the market develops.

ELTIF Ready

ELTIF 2.0 entered into force on 9 April 2023 and will apply from 10 January 2024. On 1 November 2023, the CBI published CP155. This sets out the CBI's proposal to introduce a new standalone Chapter 6 within the CBI's AIF Rulebook, to support the establishment and authorisation of ELTIFs in Ireland. The publication of CP155 is welcomed and highlights the CBI's constructive steps towards ensuring that Ireland will be ELTIF-ready come January 2024.

CP155 confirms that the CBI's intention is that the ELTIF will be a standalone product and it will not require separate authorisation as a Retail Investor Alternative Investment Fund ("RIAIF") or Qualifying Investor Alternative Investment Fund ("QIAIF") pursuant to the AIF Rulebook. This will allow the existing regulated fund structures to be paired with the ELTIF product without the risk of conflicting RIAIF or QIAIF rules (i.e. one set of product rules apply). Chapter 6 primarily addresses supervisory and operational matters, such as expected disclosures and regulatory reporting, rather than product-specific rules (which are already provided for directly in the ELTIF 2.0 framework).

Consistent with the intention to be ELTIF ready come 10 January 2024, the CBI has provided for a shortened consultation timeframe of six weeks, with responses to CP155 due no later than Wednesday, 13 December 2023.

Once in place, the authorisation process for ELTIFs is expected to broadly follow the existing authorisation processes for RIAIFs and QIAIFs. For ELTIFs which are limited to professional investors, this is understood to mean that they will benefit from the 24 hour authorisation timeframe available for QIAIFs.

ELTIF Regulatory Technical Standards

The market is still awaiting the outcome of ESMA's consultation on the ELTIF regulatory technical standards (the "RTS"), which provides detailed rules on key terms relevant for semi-liquid ELTIFs, including minimum holding periods, redemption notice periods and maximum redemption frequency. Given the range of assets and strategies that ELTIFs will be able to pursue, it is essential that the RTS do not adopt a "one size fits all" approach and allow for sufficient flexibility for the ELTIF 2.0 to be able to achieve its full potential.

The ELTIF Prize

The enhanced ELTIF regime has the potential to be a success, second time around, particularly where the RTS is not unduly restrictive.

Outside the ELTIF, the ability to offer AIF products to retail and semi-professional investors across the EEA is dictated by the local rules. In some cases this has involved establishing an AIF in an individual member state, limiting the broader scalability and attractiveness of the product to investors in other EEA member states.

The prize for opting into the ELTIF product regime is the ability to establish a scalable fund that can be marketed under one set of rules to all types of investors across the EEA, both institutional and retail. Ireland's status as a leading jurisdiction for broadly distributed funds makes it a natural jurisdiction for the establishment of the scalable ELTIF 2.0 product.

The Race Is On

The race is on among managers to win first mover advantage and team up with stakeholders who can scale processes, offer end to end operations, create a distribution framework, prepare marketing materials and educate advisers in order to sell the ELTIF.

The pairing of Ireland's regulated fund structures with the ELTIF product, together with a transparent approach to delivery of service standards by the CBI are likely to be seen as a favourable proposition for managers considering a jurisdiction for their ELTIF.