Investments in Tangible Assets

A new opportunity for ELTIF - Competition for open-ended property funds

Interview with Thomas Richter, CEO of the German Investment Funds Association BVI

The EU lawmakers have decided to reform the European Long Term Investment Fund (ELTIF). It will come into effect in early 2024. The new regulations include more flexible investment opportunities and the reduction of distribution barriers. The ELTIF was introduced by the EU in 2015 as a new fund category for infrastructure investments but has so far been unsuccessful.

Mr. Richter, the BVI has campaigned intensively for the reform of the ELTIF. Why was this redesign necessary?

The old ELTIF did not gain momentum. The ELTIF regulation has been in place for eight years, and as of the end of 2022, only 77 products were launched throughout Europe with a volume of EUR 11 billion – which is only 0.07 percent of the managed fund assets in Europe. The ELTIF did not fail due to the lack of interest from investors. On the contrary, their appetite for tangible assets and infrastructure investments is enormous. However, the eligibility requirements for ELTIF were too complicated, and the distribution rules were impractical.

And these obstacles have now been eliminated?

Yes. On the distribution side, the minimum investment amount of EUR 10,000 and the limitation of investing only a maximum of 10 percent of their liquid assets in ELTIFs have been eliminated for investors.

In addition, the ELTIF has become much more flexible. The old ELTIF focused on investments in small and medium-sized enterprises with very low market capitalisation and tangible assets with an individual value of at least EUR 10 million. Liquid investments in open-end securities funds (UCITS) and their investment assets were only possible up to 30 percent.

In the future, tendentially illiquid corporate holdings and tangible assets can still be acquired, but with loosened restrictions. However, the crucial innovation is that the ELTIF can now also be designed as a master fund and can invest up to 100 percent in liquid investments such as UCITS and AIFs. In particular, we had advocated for this expansion of the target fund universe.

Does this mean that the original intention of designing ELTIF primarily for tangible assets, infrastructure projects and small and medium-sized enterprises has been abandoned?

More or less. The ELTIF is now a multi-asset product with an EU passport for cross-border distribution. AIFs regulated at member state level that cannot easily be marketed across national borders, such as our open-ended property fund, could now be sold across the EU under the umbrella of an ELTIF fund of funds, for example. Additionally, the ELTIF has two advantages over open-end property funds: it is not restricted to the investment catalogue of the German Investment Code (KAGB), and it has a higher borrowing limit. Therefore, the ELTIF can become a serious competitor to German real asset funds.

You have already hinted at another topic: the ELTIF can also be set up as an open-ended fund. What exactly will that look like?

This is one of the few points of criticism we have regarding the new regulation because there are no criteria for designing the ELTIF as an open fund. The task of developing guidelines for share redemption mechanisms of an open ELTIF has been delegated to ESMA. Until they present their proposals, which must still be approved by the Commission, we must live with a certain legal uncertainty.

Nevertheless, we have achieved a lot with the new ELTIF. I am confident that it will be successful. The ELTIF can be designed flexibly and distributed across borders. And as mentioned at the beginning: there is interest from investors. They are looking for investments in infrastructure, renewable energies, private debt, and private equity.

The questions were asked by Christiane Lang, Internet Editorial Team.

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