European Long Term Investment Funds (ELTIFs) have been available to retail investors since 2015 and were designed to encourage more non-banking finance capital into the real economy through alternative investment funds (AIFs).
But a rigid regulatory framework meant appetite for the product was low and ELTIFs failed to achieve their objective.
Enter ELTIF 2.0 – a new regime which came into force at the start of 2024 offering a much more attractive structure, which policymakers hope will finally democratise investment in assets such as infrastructure, real estate, and private debt, which have long been the preserve of institutional investors.
The overhaul of the ELTIF regime is essential in securing the additional capital needed to support Europe’s ‘Net Zero by 2050’ targets through investment in the private markets that typically support the green transition.
At the same time, the new relaxed rules afford retail and professional investors greater opportunity to meet their sustainable investment objectives.
What exactly has changed?
ELTIF 2.0 focuses on broadening the scope of eligible assets:
- Removing some of the portfolio composition and diversification restrictions
- Expanding the use of master feeder structures and funds and fund-of funds
- Easing the rules on redemption provisions
- Essentially allowing for ELTIFs to be open-ended.
While ELTIF 2.0 is designed to make it easier for retail investors to participate in private markets, there are strict rules about how these funds are marketed.
The rules are firm that Alternative Investment Fund Managers (AIFMs) must make a clear distinction between ELTIFs designed for professional investors – as defined in MIFID II – and those aimed at the retail market.
For example, where ELTIFs are marketed to professional investors, the borrowing limit under the new rules increases from 30% of the fund’s capital to 100%, while for retail the limit is now 50%.
Further, relaxed investment restrictions mean ELTIFs solely reserved for professional investors can acquire 100% of the units, shares or interests of a single ELTIF, EU venture capital fund (EuVECA), social entrepreneur fund (EuSEF), UCITS or EU AIF managed by an EU AIFM.
Firms looking to take advantage of the new ELTIF 2.0 regime need to consider the additional complexities associated with marketing to retail investors, and it is also worth noting that the European Securities and Markets Association (ESMA) is yet to provide all the regulatory technical standards (RTS Level 2), including those governing redemption policy and life of ELTIFs.
The attraction of Ireland
In March 2024, following a consultation (CP155), the Central Bank of Ireland (CBI) updated its AIF Rulebook with a new Chapter dedicated to ELTIFs.
Chapter 6 sets down rules that ensure Ireland is ready for the revised ELTIF regime, and the delayed Level 2 measures for ELTIFs were adopted in amended form by the European Commission on the same day as the Central Bank published its documents.
The CBI’s commitment to ELTIF 2.0 means the country is now aligned with other jurisdictions, including Luxembourg, and the provision for these long-term funds for retail and professional investors completes Ireland’s alternative investment toolkit.
Within Chapter 6, the CBI has made sure that Ireland is seen as an attractive destination for fund managers interested in setting up an ELTIF.
1. Irish-domiciled ELTIFs will be authorised under the existing Irish investment fund legislation and will be subject to the same favourable tax regime as currently applies to a regulated fund established as an Irish ICAV, Irish PLC, Irish investment limited partnership (ILP), Irish unit trust or Irish common contractual fund (CCF), as applicable.
To the extent an Irish-domiciled ELTIF is established as a tax opaque regulated fund – including an ICAV, a PLC or Unit Trust – the ELTIF will be tax-exempt in Ireland on its income and gains. Provided certain administrative requirements are fulfilled, distributions or any encashment, redemption, cancellation or transfer of shares/units by investors who are not Irish tax resident or ordinarily resident will, generally, be free of Irish tax.
For tax transparent funds such as an ILP or CCF, distributions can be made to investors free of any Irish tax implications as all the underlying profits of the ELTIF ILP will have been allocated to investors for Irish tax purposes already.
2. The regulator has applied a 24-hour authorisation process to ELTIFs that are offered solely to qualifying Investors.
This ‘fast-track’ process gives managers the flexibility to allow investment by wealth management and private banking clients along with dependable speed to market.
Third, the CBI will permit umbrella structures to include ELTIF and non-ELTIF sub-funds. This means managers can add ELTIF sub funds to established umbrellas and benefit from existing infrastructure.
Making ELTIF 2.0 a Success
Those with an eye on the ELTIF 2.0 market have a real opportunity to benefit from the new framework, especially in Ireland. Yet, firms need to ensure they have the right support to get funds in place.
JTC in Ireland provides AIFM, Administration, Depository and Corporate Services solutions with an established team of experts. JTC is perfectly placed to help you set up a compliant ELTIF.
To find out more about how to take advantage of the reinvigorated market, contact Orla Philippon or visit our dedicated Ireland page here.
Members of JTC’s UK and Ireland will be attending the Irish Funds Alternative Investment Seminar on Thursday. If you would like to meet them to discuss ELTIFs or other funds, please contact Melanie Herbert, Padhraic McLaughlin, Clay Dupuy or Jon Masters.
