Exploring the Enhanced Opportunities Offered by the Updated EU ELTIF Fund Structure

The European Union's revised European Long-Term Investment Funds (ELTIF) framework, known as ELTIF 2.0, implemented since January 2024, represents a significant evolution in the landscape of long-term investment options. This framework aims to facilitate cross-border investment opportunities for both professional and retail investors, addressing previous limitations and providing a more attractive environment for fund managers and investors alike.

The distinctive feature of ELTIFs is their ability to be marketed to both professional and retail investors. They are also the first alternative investment funds approved for retail investors to invest in alternative assets. The introduction of the ELTIF label has a goal of promoting long-term investment within the EU and granting investors access to alternative assets, all while ensuring appropriate protection for investors.

The process of obtaining authorization is initiated by submitting an application to the appropriate governing body of the relevant AIF, which in the case of Cyprus is the Cyprus Securities and Exchange Commission. Approval for the license will be granted upon meeting the conditions set forth in the ELTIF Regulation and receiving the endorsement of the EU AIFM, the fund's bylaws or articles of incorporation, and the depositary by the competent authority.

Key Changes and Features:

Expanded Eligible Investments

ELTIF 2.0 broadens the scope of eligible investments to include a wide range of "real assets." These assets encompass various forms of infrastructure, including communication, environmental, energy, and transportation infrastructure. Moreover, investments in social infrastructure such as retirement homes, schools, and hospitals are now permitted. Additionally, the framework allows for investments in intellectual property, industrial facilities, vessels, and aircraft, reflecting a more comprehensive approach to long-term investment strategies.

In addition, the option to invest in fintech projects as well as infrastructure in third countries is included, subject to certain conditions, as long as the third country is not considered a high-risk or non-cooperative jurisdiction for tax purposes. ELTIF 2.0 also increases the limitations for investing in listed entities, permitting investments in companies with a market value of up to €1.5 billion instead of €0.5 billion. Furthermore, it enables investments in

uncomplicated, transparent, and standardized securitizations such as residential or commercial mortgage-backed securities, up to a maximum of 20% of the fund's total capital.

Increased Borrowing Limits

Under ELTIF 2.0, borrowing limits have been significantly increased, providing fund managers with greater flexibility in leveraging funds. Notably, the maximum borrowing limits have been raised to 50% of the fund's net asset value for funds targeting retail investors and up to 100% for funds aimed at professional investors. This adjustment represents a departure from the more conservative borrowing limits imposed by the previous ELTIF framework, allowing fund managers to pursue more ambitious investment strategies.

Flexibility in Investing and Diversification

ELTIF 2.0 introduces several key changes aimed at enhancing flexibility in investment and diversification strategies. Firstly, the framework reduces the minimum investment requirement for eligible assets from 70% to 55% of the fund's capital, enabling fund managers to allocate a greater portion of funds towards alternative investments. Additionally, ELTIF 2.0 increases the maximum investment allowed in a single asset from 10% to 20% of the fund's capital, providing fund managers with more latitude in portfolio management. These adjustments are expected to facilitate a more efficient allocation of capital and reduce investment-related transaction costs.

The updated framework has broadened the scope for utilizing fund of funds techniques, stating that an ELTIF is permitted to allocate up to 20% of its funds into a single ELTIF, EuVECA, EuSEF, UCITS, or EU AIF that is managed by an EU AIFM. Furthermore, it also allows for the implementation of master-feeder structures, as long as both funds are ELTIFs.

Improved Accessibility for Investors

ELTIF 2.0 aims to broaden access to long-term investment opportunities for a wider range of investors by removing certain barriers. Notably, the framework eliminates the minimum investment threshold of €10,000 and the restriction on investing more than 10% of an investor's portfolio in ELTIFs. Additionally, the obligation for distributors or managers of ELTIFs to offer "suitable investment guidance" to retail investors has been revoked. These changes are intended to democratize access to long-term investment products and foster greater participation in sustainable investment initiatives.

Expected Impact

The enhancements introduced by ELTIF 2.0 are expected to have a transformative impact on the European long-term investment landscape, fostering greater collaboration between fund managers and investors and driving increased investment in key sectors of the real economy. The framework's emphasis on sustainability and economic development aligns with broader EU initiatives aimed at promoting long-term growth and resilience. As ELTIF 2.0 gains traction, it is poised to become a cornerstone of the European investment ecosystem, offering a robust framework for long-term investment strategies.

ELTIF 2.0 represents a significant step forward in the evolution of long-term investment options in the European Union, offering a comprehensive framework for fund managers and investors to pursue sustainable growth and economic development. By addressing previous limitations and introducing key enhancements, ELTIF 2.0 is expected to unlock new opportunities for collaboration and investment across borders. As fund managers and investors adapt to the new regulatory environment, ELTIF 2.0 is poised to play a central role in driving long-term growth and resilience in the European economy.

Disclaimer: This article provides general information and should not be construed as legal advice. For personalized guidance and advice on specific legal matters, please consult with qualified legal professionals familiar with the relevant regulations.

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