The European Parliament approved the rules creating European Long-Term Investment Funds (ELTIFs) on its Plenary Session of 10 March 2015 after the political agreement reached between the Parliament and the Council in November 2014.
ELTIFs are aimed at addressing banks’ reluctance to lend to small businesses or open-ended research projects and designed to benefit the real economy and society by channelling non-bank funds into long-term projects to deliver infrastructure, intellectual property or research results. These private funds aim to boost the finance available to companies in search for long-term capital for projects relating to energy, transport but also social housing, schools and hospitals. ELTIFs are expected to help pension funds, insurance companies, professional and even retail investors willing to invest at least €10 000 over the long term to put money into projects in any EU Member State, provided these projects benefit the EU economy.
The new funds will be available to all types of investors across Europe, subject to certain requirements set out in EU law. These requirements include the types of long-term assets and firms that the ELTIFs are allowed to invest in, how they have to spread their money to reduce risks and the information they have to provide to investors. ELTIFs will have to apply for authorisation, have a regulated structure and play by uniform rules to assure that they would offer long-term and stable returns. There are additional rules for ELTIFs offered to retail investors. Any ELTIF manager will also have to comply with the stringent requirements of the Alternative Investment Fund Managers Directive to provide adequate protection for its investors. Under the Commission’s proposal, ELTIFs would have to meet a set of common rules on having a depositary to keep assets safe, spreading assets to prevent too much money going into one asset, only use derivatives to manage currency risks in relation to the assets they hold (and not for speculation) and obeying limits on the amount they can borrow.
ELTIFs would invest in illiquid assets with the aim of providing long-term financial support for firms and projects that need it. Investors will usually be able to withdraw money at the end date of their investment that is at least in ten years. In exchange, investors would be rewarded with a regular income stream and appropriate return. However, funds that are offered to retail investors must provide extra safeguards. To protect retail investors, an ELTIF that has enough liquid assets to return an investor’s money could do so at the investor’s request.
The ELTIF initiative is welcomed by the industry and parliamentarians as the first step towards building the Capital Markets Union (CMU). After the full House vote in the European Parliament, the rules must be officially endorsed by the Council and should apply 6 months after their entry into force.
BETTER FINANCE, however, does not consider ELTIFs as the most effective means to develop long-term retail investments taking into account that the European retail investment landscape is already planted with too many and often too complicated products. Nevertheless, we support the high threshold for minimum investment in ELTIFs as these funds should be advised only to qualified and financially literate investors and only by highly qualified retail distributors.
Please find here Guillaume Prache, Managing Director of BETTER FINANCE, article on "Long Term Funds (ELTIFs) for individual investors?".
For more information, please visit the website of the European Commission or the European Parliament.