No ELTIFs ands or Buts….ELTIF 2.0 Goes Live in Ireland

Gayle Bowen and Shane Geraghty (K&L Gates) discuss the key characteristics of ELTIF 2.0, the new Irish ELTIF regime which provides a quick and flexible structure that gives managers speed to market, and the huge appeal to private fund managers to open up their products to a larger pool of investors.  

The newly revamped European Long-Term Investment Fund (ELTIF) regime, known as ELTIF 2.0, is an EU alternative investment fund that provides private fund managers with access to both professional and retail clients under a pan-European retail passport.  ELTIFs are designed to boost non-bank investment in the real economy and provide an alternative source of finance to all sectors of the real economy, which includes infrastructure, energy, SMEs, housing, education, transport, private equity, lending/debt and will open up these assets classes to a broader range of investors. 

Although ELTIFs were originally created back in 2015, this original regime was quite restrictive and there was little uptake.   As a result, amendments were made to the regime to make it more attractive to private fund managers and for retail investors.  ELTIF 2.0 came into effect on 10 January 2024 and consequently, ELTIFs are able to invest in a broader range of assets and a number of restrictions on retail investors investing in these products were relaxed.  

Permitted Investments 

ELTIFs are multi-asset products. Their investments can be divided into 2 asset categories.  

• They must invest at least 55% of their capital in Eligible Investment Assets, which are generally illiquid and require a commitment for a certain period of time.  These assets include private/long-term equities issued by “qualified portfolio undertakings” (QPUs), loans to QPUs, green bonds, real assets (including real estate, infrastructure, environment, energy or transport) and units in underlying funds which invest in ELTIF-eligible assets. 

• They may also invest up to 45% in liquid assets, namely, UCITS eligible assets. 

They are subject to diversification requirements, which differ depending on the types of investors they target, for retail investors, they are generally restricted to a 20% restriction in any single issuer or asset, with a 30% restriction into the units of a single collective investment scheme.  Master/feeders are permitted but only into another ELTIF, they cannot feed into a non-ELTIF AIF. For fund of fund strategies, the underlying funds must be EU AIFs with EU AIFMs and invest in ELTIF eligible assets.  They are also subject to a 50% borrowing restriction, raised to 100% for professional only ELTIFs. 

Redemptions & Liquidity 

As ELTIFs primarily participate in long-term investments, the updated ELTIF Regulations provide that investors in principle, should not be able to request the redemption of their units before the end of the life of the ELTIF.  However, by way of a derogation, the revised ELTIF Regulations provides that redemptions are possible during the life of an ELTIF, subject to certain conditions being met.  This is particularly relevant to evergreen funds, which offer periodical redemptions. 

The provision of redemption and liquidity facilities within ELTIFs is still being finalised under the EU Level 2 Regulatory Technical Standards (“RTS”). Last March, the European Commission (“EC”) challenged and revised a number of the provisions originally put forward by ESMA. On 19th April 2024, ESMA reissued its proposals to the EC as an Opinion.  

While ESMA has accepted most of the EC’s changes, it has modified some of them as a compromise. The main difference now between the two drafts that needs to be reconciled, relates to the liquidity requirements for open-ended ELTIFs.  

The EC’s draft provided ELTIF managers with two different approaches to consider in determining the maximum amount of assets that can be redeemed: 

• One approach is to limit redemptions to a proportion of the ELTIFs assets based on its redemption frequency/cycle; 

• The other approach is to require open-ended ELTIFs to hold a certain proportion of liquid assets.

Managers would not be required to hold liquid assets under the ECs proposals, they could instead opt for a gating mechanism.  

Under ESMAs revised proposals, it has reduced the amount of liquid assets that an open-ended ELTIF should hold based on its redemption notice period, however, it remains wedded to a mandatory requirement for an open-ended ELTIF to hold liquid assets, even if they also provide a gating mechanism. The ESMA thresholds are set out in the table below:

Speed is now of the essence and it is now with the EC to finalise. Given that the success of the product is contingent on this, the EC is expected to finalise the RTS quickly.

Distribution

The main attraction of the ELTIF product, is the ability to market via a pan-European passport to retail investors.  The passport is similar to the AIFMD passport and only requires a notification to the competent authority of the AIFM’s home member state and can be effected within 20 business days across the EU.  It should however be noted that retail includes high net worth and sophisticated institutional investors that are not classified as professional investors, which up until now, funds have not been able to target under the AIFMD passport.   Consequently managers in the past have excluded these investors, but this will no longer be required for an ELTIF and will broaden their investor base. 

New Irish ELTIF Regime

The new Irish ELTIF regime, which went live on 11 March 2024 provides a quick and flexible structure that gives managers speed to market. Under the new Irish regime: 

• ELTIFs may be set up as umbrella Qualifying Investor Alternative Investment Fund (“QIAIFs”) or as Retail Investor Alternative Investor Funds (“RIAIF”) structures and are able to utilise the full range of available legal structures, e.g., ICAV, PLC, Unit Trust, CCF or ILP. Umbrella structures have segregated liability between sub-funds. 

• The local rules that generally apply to Irish QIAIFs and RIAIFs are generally disapplied and consequently, ELTIFs are not subjected to any gold-plating requirements, making them more flexible that non-ELTIF AIFs, eg, the following Central Bank requirements have been disapplied to ELTIFs: Its loan-origination requirements; subsidiary rules; private equity requirements 

• QIAIF ELTIFs will be approved under an expedited fast-track authorisation process, even where selling to Qualifying Investors, which can include sophisticated high net worth individuals and institutional investors, as well as professional investors.  This is an attractive feature and will greatly improve speed to market. 

• The use of co-investment vehicles with other parties and loans to qualifying portfolio companies is also possible. 

Conclusion

The recent revamp of the ELTIF product and the ability to capture certain high net worth and institutional investors under a streamlined passport notification, is hugely appealing to private fund managers and can open up their products to a larger pool of investors.  

The proposed new Irish ELTIF regime is very flexible and will provide speed to market.  The availability of the expedited fast track authorisation process not only for professional investors but also for certain other “Qualifying” sophisticated investors, which will include high net worth individuals and institutional investors will be a key attraction.  Irish Fund structures are not subject to Irish corporate tax and are not liable for capital gains taxes on any profits or gains and can avail of Ireland’s extensive double-tax treaty network and thereby can avail of reduced rates of foreign withholding taxes. Unlike ELTIFs established in certain other jurisdictions, which are generally targeted at local/domestic investors, Irish funds will be the preferred choice for managers seeking pan-European and global distribution opportunities and speed to market.