Industry Insights: ELTIF 2.0: Opportunities for International Managers and Investors

Contributed by IQ-EQ

In January 2024, ELTIF 2.0 – a new version of the European Long-Term Investment Fund framework – came into force. Designed to boost take-up of ELTIF funds by making them more attractive to investors and easier for managers to launch, this framework made several changes to the original ELTIF regulation introduced in 2015.

In this article, IQ-EQ examines ELTIF 2.0 through an Irish lens, exploring its implications for asset managers, pension trustees and insurers before showcasing Ireland as a jurisdiction of choice for distributing ELTIF products across the EU.

ELTIFs Explained

ELTIFs are a specific type of investment fund designed to help finance the European ‘real economy’ – by channelling capital into long-term infrastructure projects and small and medium-sized enterprise (SME) financing – while simultaneously opening up the private markets to retail investors. Classified as European alternative investment funds (AIFs), they’re able to invest in a wide range of assets, including unlisted companies, real assets (infrastructure, commercial property etc.) and private equity funds.

When ELTIFs were pioneered a decade ago, there was optimism over their potential. However, as a result of restrictive rules, the take-up of these funds did not scale up as expected. For example, at the end of 2022, there was only around €11.3 billion in ELTIF structures – a fraction of the amount in European AIFs overall.

The Benefits of ELTIF 2.0

Recognising the problems with the original framework, the European Commission proposed a new, less restrictive version of the ELTIF regulation in November 2021. Named ELTIF 2.0, this came into force on 9 April 2023 and was applicable from 10 January 2024.

Compared to the original ELTIF regulation, ELTIF 2.0 is far more user friendly, both for managers and investors. For a start, the definition of what constitutes an ‘eligible investment asset’ has been expanded considerably. Under the new framework, eligible assets include FinTech assets, Simple, Transparent and Standardised (STS) securitisations, European green bonds, and certain non-EU assets. As for real assets, which were a key part of the original regulation, the definition of this asset class has been broadened, with removal of the minimum value requirement (previously €10 million) as well as the requirement to have economic or social benefit.

Next, there is far more flexibility in asset allocation and structuring. For instance, eligible assets now only need to represent 55% of an ELTIF’s net assets instead of 70%, while the maximum investment in a single eligible asset has been increased from 10% of the fund to 20%. In terms of fund of funds, up to 100% of an ELTIF can now be invested in target funds, including UCITS and EU AIFs managed by authorised alternative investment fund managers (AIFMs). This allows for greater diversification without the previous limitations on cascading investments.

Importantly, unlike in the original framework, distributors and managers are not required to set up local facilities agents in each EU member state where ELTIFs are marketed and carry out suitability assessments for retail investors. This alleviates a considerable administrative burden for managers.

On top of all this, retail investors no longer have to make a minimum investment of €10,000, and distributors no longer need to ensure that investors with a portfolio of less than €500,000 don’t invest more than 10% of their overall assets in ELTIF products.

So not only should ELTIF 2.0 make life easier for managers, but it should make ELTIF funds more attractive to a wider range of investors. Ultimately, it’s a win-win.

Implications for Institutional Investors

For institutional investors such as pension firms and insurers, there are some favourable implications of the new framework. With a broader range of eligible assets and greater flexibility in product structure, pension firms should be able to better align ELTIFs with their long-term liabilities by using the funds' structural characteristics to specifically match their obligations. It’s a similar story for insurers, for whom ELTIFs can be used effectively for asset-liability matching (ALM).

Note that under revisions to Solvency II, due to come into force on 1 January 2026, investments by insurance companies in ELTIFs will benefit from a 22% capital charge, which is materially lower than the current weighting of 39% that applies to certain types of long-term illiquid investments in other forms of AIFs. Additionally, ‘look-through requirements’ will not apply to ELTIFs, meaning that complex asset-by-asset analysis of underlying investments will not be required when calculating capital charges.

Ireland’s ELTIF Advantages

Luxembourg has traditionally been the preferred domicile for the original ELTIF. With the introduction of ELTIF 2.0, however, locations like France, Italy and Ireland are fast becoming additional jurisdictions of choice for managers.

Ireland is currently growing in popularity for the ELTIF, offering several advantages for asset managers. These include:

●      Product design flexibility: In Ireland, an ELTIF can be established as a Retail Investor ELTIF, a Qualifying Investor ELTIF (this has a minimum subscription of €100,000), or a Professional Investor ELTIF. Funds can utilise various legal structures (e.g. investment limited partnership (ILP), Irish collective asset-management vehicle (ICAV), public limited company (PLC), unit trust, common contractual fund (CCF)) and ELTIFs can be established as sub-funds of an umbrella ELTIF

●      Favourable regulation: Local rules for Retail Investor AIFs (RIAIFs) and Qualifying Investor AIFs (QIAIFs) are generally removed for ELTIFs, eliminating gold-plating requirements and offering greater flexibility than non-ELTIF AIFs. For example, Central Bank of Ireland requirements such as subsidiary rules, loan origination, and private equity rules do not apply to ELTIFs. Co-investment vehicles and loans to qualifying portfolio companies are also permitted

●      Fast-track approval: Qualifying Investor ELTIFs and Professional Investor ELTIFs benefit from a fast-track 24-hour approval process. This can significantly improve speed to market for ELTIFs seeking to raise capital from sophisticated high-net-worth individuals and institutional investors.

IQ-EQ’s Guide to ELTIF 2.0

Overall, the Irish ELTIF regime provides a streamlined structure for managers, offering speed to market and the flexibility to target both professional and retail investors across the EU. Via this jurisdiction, managers can leverage ELTIF 2.0 to launch innovative products, tap into global capital flows, and serve a broad investor base.

For a deeper dive into ELTIF 2.0, download our whitepaper, which covers the regulation in detail and offers practical guidance. Alternatively, get in touch with our specialist team.