EUROPE: Parliament approves new rules on ELTIFs

Tuesday March 17 2015

The European Parliament has announced that it has approved rules creating a new investment vehicle, the ELTIF.

European Long-Term Investment Funds are vehicles designed to boost non-bank investment in the real economy across Europe. They will help pension funds, insurance companies, professional and retail investors willing to invest at least €10 000 over the long term in one or more ELTIFs to put money into projects in their own countries or elsewhere, provided these projects benefit the EU economy: be it infrastructure, machinery or equipment, education, research or fostering the growth of small and medium-sized enterprises (SMEs).

ELTIFs investment funds 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. They will not be permitted to invest in speculative assets and any investors putting money in them will be properly informed and protected.

ELTIF investors will have to make a long term commitment since they will not be able to withdraw their money easily. However, to protect retail investors in particular, the negotiators agreed “redemption” rules that would enable an ELTIF that has enough liquid assets to return an investor’s money at the investor’s request.

To qualify as an ELTIF, funds would:

• only invest in certain types of assets (unlisted companies needing long-term capital, such as infrastructure, notably in network industries such as transport and energy, but also social infrastructure (hospitals, schools and social housing); certain listed small and medium sized enterprises (SMEs); real assets that need long-term capital to develop them; intellectual property and other intangible assets; European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF)).
• At least 70% of the money in the fund has to be invested in these assets. ELTIFs will have up to five years to invest at least 70% of the money. They can have 30% in other assets. This is to provide the ELTIFs with some flexibility regarding when to sell assets or replace them with new ones. The 30% buffer can be held in assets that would be eligible for a UCITS fund. This is to prevent ELTIFs from holding risky assets.
• only be offered by a manager who is authorised under AIFMD and so be subject to its rules, for example, the obligation to have a depositary.
• run for a specified period of time during which investors do not usually have the right to get their money back.
• Strictly limit derivative use to currency and other directly related risks so avoiding their use for speculative reasons
• Limit leverage.

If an ELTIF is marketed to retail investors, it would be a Packaged Retail and Insurance-based Investment Product (PRIIP) and so subject to the requirement to have a key information document, or KID, explaining its features and its risks. The KID will be a three page document that will set out in plain language what the most important feature of the PRIP is and what its risks are.

After the full House votes on these rules, which have been already been informally approved by the member states the rules must be officially endorsed by the Council and they should apply 6 months after their entry into force.

The final text of the Regulation has not yet been made available.

Click on the below link for the Parliament`s press release.