Focusing on Funds: ELTIFs and LTAFs

A type of EU domiciled regulated alternative investment fund (AIF) introduced in the European Union to encourage investment into companies and projects which need long-term capital and increase the number of long-term investment opportunities available to institutional and private investors across Europe.

ELTIF is a label on top of regular national product laws – for instance, in Luxembourg:

• SIF, SICAR, RAIF for well-informed investors;
• SCS, SCSp, Part II UCI for all investors; and
• Possibility of ELTIF label at compartment level

In principle, ELTIFs are closed-ended. Early redemptions during the life of the ELTIF under specific conditions to be developed in draft regulatory technical standards (RTS) by the ESMA (e.g., minimum holding period, detailed redemption policy, matching mechanism).

Similar to the ELTIF, a UK category of authorised fund designed to invest efficiently in long-term assets.

Can take the following forms:

• an authorised contractual scheme (ACS) (either by a co-ownership scheme or an authorised limited partnership scheme);
• authorised unit trust (AUT); or
• open-ended investment company (OEIC).

UK Professional investors UK DC pension schemes. SIPPs High net worth and other retail investors can also invest in the LTAF.

Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds. 2

The ELTIF Amending Regulation shall start applying as from 10 January 2024, with a five- year transitional period for pre-existing ELTIFs that are still raising capital and an opt- in regime, for those ELTIF managers who want to opt into the revised rules, by notifying their member state NCA.

The FCA rules set out in COLL.

Authorised fund managers (AFMs) will also need to comply with rules in other sourcebooks forming part of the FCA rules including PRIN, FUND, COBS and SYSC.

At least 55% 3  of its of its capital in eligible investment assets:

• equity, quasi equity and debt instruments issued by or loans granted to a qualifying portfolio undertaking with a capitalisation threshold of EUR 1,5bn;
• financial undertakings younger than 5 years;
• green bonds;
• real assets – i.e. assets that have an intrinsic value due to its substance and properties;
• simple, transparent and standardises securitisations (STS) where the underlying assets consist of long-term exposures

At least 50% of its asset value in long- term, illiquid assets.

This could include (directly or indirectly):

• Private equity and other unlisted securities
• Private credit
• Venture capital
• Infrastructure
• Real estate
• Forestry
• Precious metals

The principle of prudent spread of risk applies.

Yes (subject to limits and restrictions):

• debt instruments issued by a qualifying portfolio undertaking;
• loans granted by the ELTIF to a qualified portfolio undertaking with a maturity of no longer than the life of the ELTIF.

Diversification requirements:

An ELTIF shall invest no more than:

• 20% of its capital in a single qualifying portfolio undertaking (whether instruments issued by or loans granted to such undertaking);
• 20% of its capital in a single real asset; and
• 20% of its capital in units or shares of any single ELTIF, EuVECA, UCITS, or EU AIF managed by an EU AIFM (i.e., forming part of the underlying funds for ‘eligible assets’ outlined above) and comprising no more than 30% of the units or shares of that fund. This restriction does not apply to feeder ELTIFs;
• 10% investment limit on UCITS funds in any individual issuer (increased to 25% where bonds are issued by a credit institution with its registered office in a member state and that is subject to public supervision);

Aggregate risk exposure to STS is limited to 20% of the ELTIF’s capital.

Concentration limits:

An ELTIF may acquire no more than 30 % of the units or shares of a single ELTIF, EuVECA, EuSEF, UCITS or of an EU AIF managed by an EU AIFM.

Both diversification requirements and concentration limits shall not apply where ELTIFs are marketed solely to professional investors.

The FCA expects the investment strategy of a long-term asset fund to be to invest at least 50% of the value of the scheme property in unlisted securities and other long-term assets. As noted above, the over-arching diversification requirement is that there is a “prudent spread of risk”.

Subject to that, there are comparatively few express spread/concentration requirements.

Yes (subject to certain conditions).

Aggregate risk exposure to a counterparty from OTC derivative transactions, repurchase agreements, or reverse repurchase agreements limited to 10% of ELTIF’s capital.

A financial derivative instrument shall only be used for hedging risks arising from exposures to eligible investment assets and the use of the financial derivative instruments aimed to provide a return for the ELTIF shall not be deemed to serve the purpose of hedging the risks.

ESMA shall develop draft regulatory technical standards (RTS) to determine the criteria for establishing the circumstances in which the use of financial derivative instruments solely serves hedging purpose.

Yes (subject to certain conditions).

The total exposure relating to derivatives held in a LTAF may not exceed the net value of the scheme property.

Maximum exposure must be covered globally.

While these funds are in principle closed- ended, the ELTIF Amending Regulation introduces the possibility for de facto open- ended ELTIFs, allowing redemption rights for ELTIF investors during the lifetime of the ELTIF under specific requirements. 5

The requirements include appropriate redemption policies and liquidity management tools are compatible with the relevant ELTIF’s long-term investment strategy. A matching mechanism should be put in place with full or partial matching of transfer requests of units or shares of the ELTIF by exiting investors with transfer requests by potential investors.

The fund is open-ended but it needs to have notice periods on redemptions (including minimum redemption notice period of 90 days). The fund will also typically have liquidity tools such as

• initial lock-in periods and minimum holding periods.
• deferral of redemptions.
• limits or caps on the number of units that can be redeemed on one occasion or over a period of time.
• side pockets.

Any liquidity management tools must be clearly disclosed in the prospectus (including worked examples of what they mean for investors in practice).

An EEA authorised AIFM

A full-scope UK AIFM with permission to manage an authorised AIF

At least annually. 

There are requirements as to what needs to be in the annual report of the ELTIF.

A report in respect of each annual accounting period, half-yearly accounting period and quarterly reporting period. 

The depositary must make an annual report to unitholders which must be included in the annual report.

An ELTIF may borrow cash if it represents:

• no more than 50% of the NAV of the ELTIF marketed to retail investors; OR
• no more than 100% of the NAV of the ELTIF if solely marketed to professional investors.

Borrowing is capped at 30% of the NAV of the scheme; as such this may constrain investment in infrastructure and other similar asset classes.

ELTIF managers are still required to conduct suitability assessments of retail investors and take certain additional steps in order to meet the needs of retail investors. For example, managers must provide written alerts when marketing an ELTIF with a term of more than 10 years.

However, the burden of marketing to retail investors and admitting them into an ELTIF has been reduced under the ELTIF Amending Regulation:

• Local facilities: there is no longer a requirement to put in place local facilities in each EEA Member State in which the ELTIF is marketed to retail investors for making subscriptions, payments to unitholders or redemptions. This relieves managers of a significant compliance cost.
• Minimum subscription: retail investors with a portfolio of financial instruments of less than EUR 500,000 were subject to a minimum investment amount of EUR 10,000 and a 10% exposure limit to ELTIFs. These requirements no longer apply.

• Suitability test: this has been aligned with the requirements of MiFID II, which simplifies the approach for managers.

Units in the LTAF are, with effect from 3 July 2023, now categorised as restricted mass market investments and may be marketed to retail investors, subject to providing requisite risk warnings on liquidity.

Where there are retail investors. Additional retail protection measures apply.