The Regulation of European Long-Term Investment Funds (‘ELTIFs’)

54 Pages Posted: 3 Feb 2021

See all articles by Sebastiaan Niels Hooghiemstra

Sebastiaan Niels Hooghiemstra

Erasmus University Rotterdam (EUR); Loyens & Loeff Luxembourg

Date Written: November 22, 2020

Abstract

In accordance with the Europe 2020 strategy, long-term finance is a crucial enabling tool for putting the European economy on a path of smart, sustainable and inclusive growth with high employment, and competitiveness for building tomorrow’s economy in a way that is less prone to systemic risks and is more resilient. Certain types of alternative investment funds (‘AIFs’) provide finance of lasting duration to various infrastructure projects, unlisted companies, or listed small and medium-sized enterprises (‘SMEs’) that issue equity or debt instruments for which there is no readily identifiable buyer. By providing finance to such projects, these types of AIFs contribute to the financing of the European Union’s real economy.

Furthermore, AIFs, on the demand side, provide a steady income stream for pension administrators, insurance companies and other entities that face regular and recurrent liabilities and are seeking long-term returns within well-regulated structures.

While providing less liquidity than investments in transferable securities, AIFs can provide a steady income stream for individual investors that rely on the regular cash flow that an AIF can produce. Furthermore, AIFs can also offer good opportunities for capital appreciation over time for those investors not receiving a steady income stream.

‘Long-term financing’ for projects, such as transport infrastructure, can be scarce. As the financial crisis in 2007/2008 has shown, complementing bank financing with a wider variety of financing sources that better mobilize capital markets could help tackle financing gaps. AIFs, under certain conditions, can play a crucial role in this respect.

The ELTIFR as an optional specialist regime has been adopted for alternative investment fund managers (‘AIFMs’) to boost European long-term investments in the real economy. Long- term investments in projects, undertakings, and infrastructure in third countries can also bring capital to ELTIFs and thereby benefit the European economy. To that end, the European legislator has introduced a dedicated legal framework for AIFMs managing European long-term investment funds (‘ELTIFs’). This regime designates those AIFs as ‘ELTIFs’ that comply with the requirements under the Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds, as amended (‘ELTIFR’). EU AIFs with an ‘ELTIF’ label may be marketed to professional and certain high net-worth investors throughout the EU.

The ELTIFR establishes uniform rules, so that a clear demarcation line can be drawn between an ELTIF and other AIFs that engage in other, less specialized, investment strategies, which the ELTIFR is not seeking to promote. The ELTIFR establishes a uniform regulatory framework on the nature of ELTIFs, in particular on eligible investments in which ELTIFs are to be permitted to invest, and the investment instruments to be used. The ELTIFR is an optional regime. Where AIFMs do not wish to use the designation ‘ELTIF’, the ELTIFR does not apply. In those cases, AIFMs may continue to base themselves upon labels under existing national rules and general EU law applies.

This contribution discusses the ELTIF legal framework. Section 2 discusses the ELTIFR’s scope, including the relationship between the AIFMD and the ‘ELTIFR top-up’. Section 3 focuses on the ELTIFR and the relationship between ‘intermediary’, ‘product’ and ‘marketing/sales regulation’. These are elaborated in more detail in Section 4 (‘manager regulation’), Section 5 (‘product regulation’), Section 6 (‘depositary regulation’), and Section 7 (‘marketing & sales regulation’). Section 8 discusses the ‘ELTIFR retail investor regime’, including the retail provisions AIFMs managing ELTIFs and their distributors have to comply with. Section 9 explains the authorization regime for both AIFMs intending to manage ELTIFs and the ‘product’ ELTIF itself and Section 10 concludes.

Keywords: AIFMD, ELTIFR, SFDR, CBFD Directive, CBFD Regulation

Suggested Citation

Hooghiemstra, Sebastiaan Niels, The Regulation of European Long-Term Investment Funds (‘ELTIFs’) (November 22, 2020). Available at SSRN: https://ssrn.com/abstract=3735442 or http://dx.doi.org/10.2139/ssrn.3735442

Sebastiaan Niels Hooghiemstra (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Loyens & Loeff Luxembourg ( email )

P.O.Box 2888
3000 CW Rotterdam
Netherlands

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