According the European Commission, long-term investments clearly represent the important instrument while seeking the sustainable, advanced and integrated ensurance of European Union economic growth as well as the development of risk-resistant tomorrow’s economy.
This is stated although as a consequence of the global economic crisis the investors of the European Union Member States still mostly focus on short term economic gains. The growth of the real economy (the creation of new jobs, building of the sustainable funding for the companies, etc.) requires encouragement for the investors to make long-term commitments. As a result, the Regulation of the European Parliament and of the Council on European Long-term Investment Funds (hereinafter – ELTIF) already proposed by the Commission in 2013 became relevant. The Council adopted the Regulation on 20 April 2015 and it will enter into force on the twentieth day following its publication in the Official Journal of the European Union.
The purpose of ELTIF and benefits for the investors
ELTIF is a new type of collective investment framework allowing investors to put more money into projects and companies that need long-term capital. ELTIF is an alternative investment fund. Such framework will be implemented by the investment fund managers whose main interest is to create long-term funding opportunities for the institutional and private investors.
ELTIFs are designed to increase the amount of non-bank finance investing in the real economy of the European Union. No unified supranational regulation among the Member States as well as the appropriate mechanism for the promotion of long-term funding has been created until now. Today only a few investors, like large pension funds or insurance companies, are considered as able to take on the long-term investing because of their sufficient capital contributed by their own resources. As a matter of fact, currently existing funds permit only the non-transboundary accumulation of funds among the Member States.
So in this way ELTIFs will allow the smaller investors, such as local pension funds, municipalities and etc., diversify their investments; retail investors with future obligations (e. g. acquisition of a house, education or the financing of relevant renovation) will receive the income or regular return as well. Without these groups of investors, the real economy has no chance to use wider financing resources ensured with capital.
How will the ELTIFs work?
To be considered as ELTIF, the fund will be able to invest in all kinds of assets, which are not traded on a regulated market: investments in infrastructure projects (in the fields of transport, energy or education), investments in unlisted companies (usually small and medium), investments in the immovable property or direct purchases of infrastructure objects. In the absence of its public trading venue, such long-term assets hardly attract the purchasers immediately, hence the fund will be obliged to commit in a long-term way by acquiring it. Due to the existence of these classes of assets, the ELTIF investors will be ensured with the stable long-term return and the assets eligible under the requirements will be considered as the part of the “alternative investments”.
ELTIFs will have up to five years to invest at least 70% of their money in such assets; consequently the 30% of money they can have in other assets. This is to provide the ELTIFs with some flexibility regarding when to sell assets or replace them with new ones. In order to ensure the integrity of ELTIFs, they will not be allowed to execute certain financial transactions that might compromise their strategy and goals, because the possible additional risk, which differs from the expected risks of the long-term investment funds may occur.
ELTIFs will be governed and offered by investment fund managers and only by companies authorised under the Alternative Investments Funds Managers Directive (2011/61/EU). ELTIFs will not allow the investors to redeem the money invested in long-term assets for at least five years. Nevertheless, it does not mean that they will not be able to get their money back until the end of a fund’s life cycle – since the majority of long-term funds are the unlisted projects, the investors will have a chance to sell their shares or units in a secondary market. Consequently, for such restriction the investors will be rewarded with the “illiquidity premium”.
Among other things, before the selling, it will be compulsory to assess if the fund meets the needs of the investors to whom ELTIF is offered. As a result, the appropriate functioning of long-term funding will be ensured.
How do ELTIFs differ from other European Union investment funds?
Currently, EU investment fund markets are dominated by funds operating under the Undertakings in Collective Investments in Transferable Securities Directive 2014/91/EU (hereinafter – UCITS; previously – 2009/65/EC). UCITS directive does not provide the funding of long-term capital commitments to infrastructure and other projects. ELTIF is different from UCITS because the investors of UCITS can get their money back at any time; on this basis, the fund framework that UCITS has created is entirely based on listed securities that can be sold on a regulated market at any time.
The schemes of the European Venture Capital Funds (hereinafter – EuVECA) and the European Social Entrepreneurship Funds (hereinafter – EuSEF) target a very specific niche of the EU economy: start ups financed by venture capital and businesses specialising in achieving social impact. Moreover, both funds above set the high minimum investment at 100 000 euros. Although it does not necessarily mean that the creation of ELTIF will attract similar levels of investor interest, given the value that highly liquid funds have for many retail investors, it should attract much more capital than EuSEF or EuVECA and together with them respectively finance the European economy. Because the ELTIFs will operate according to a set of consumer protection rules, such as diversification requirements, limits on leverage, short-selling and will not have the requirement for high amount of minimum investment, ELTIF is going to be much more suitable for retail investors.
Also, as already mentioned, ELTIF is different from other European Union investment funds for its ability to invest cross-border among the Member States.
Who will want to invest in an ELTIF?
ELTIFs will attract pension funds, municipalities that have pension obligations and insurance companies that need to find assets that pay a steady, reliable income as well as the smaller investors, including retail savers who can have up to 10% of their savings invested for a number of years in return for a steady income at the end. The investors should only put money into an ELTIF if they are completely sure they will not need it for that time. That is why the fact that they usually cannot get their money back until the end of the fund has to be disclosed very clearly to each investor.
Why is it useful to invest in ELTIFs?
- Investors will be ensured with stable long-term return;
- The opportunity to invest in long-term assets will be provided as well as the opportunity to use capital invested in various Member States of the European Union;
- The managers will be allowed to control the cash flow to form a long-term portfolio as well as to use the surplus cash that is achieved “between investments” (when a long-term asset is sold in order to be replaced by another);
- Retail investors will be provided a possibility to diversify their investment portfolios (due to their nature, the alternative investments will differ from the more traditional listed shares and securities held by many investors);
- The restriction for the investors to have their money returned during the lifetime of a fund will allow to invest more money in non-liquid assets;
- Businesses would be able to get more capital from a wider range of investors than they can now; big and small investors would be able to put money into a wider range of assets, so the risks would be spreading;
- More money would be available to invest in European businesses, ultimately creating more jobs in Europe.
By Liutauras Baikstys, Associated Partner, and Greta Bagdanaviciute, Lawyer, Varul
