European Long Term Investment Fund (ELTIF)

ELTIFs are structured as a special subset of Alternative Investment Funds (AIFs) established under the AIFMD benefitting from a European passport for marketing to both professional and retail investors, subject to certain requirements. As with all AIFs, ELTIFs are subject to the AIFMD regime and are required to appoint an AIFM and a depositary.

The ELTIF regulation itself covers the investment policies and restrictions, redemption and distribution policies and marketing applicable to an ELTIF. An ELTIF must invest 55% of its capital (previously it was 70%) in eligible investment assets which include equity, bonds and debt instruments issued by a non-financial entity and listed assets up to 1 billion capitalisation; other ELTIFs, EuVECAs, EuSEFs, UCITS and AIFs investing in eligible assets;  simple securitizations; real assets (property, installations for education energy hospitals industrial, social sports etc as well as water rights, forestry, mineral rights) and  loans to qualifying portfolio undertakings. Portfolio diversification parameters have increased under ELTIF II, as well as cash borrowing limits. Redemption rights during the life of the ELTIF are now possible under specific requirements including liquidity management tools compatible with the ELTIF long term strategy. ELTIFs designed for retail investors are subject to a suitability test and are no longer subject to a minimum 10000 EUR investment requirement (now reduced to 1000 EUR).

The ELTIF RTS deal with liquidity management tools and redemption provisions, minimum holding periods and the use of derivatives solely for hedging purposes.

ELTIFs can engage in securities lending and borrowing, repo transactions and reverse repo transactions, and OTC derivatives provided the aggregate risk exposure does not exceed 10% of the capital value of the fund. Short selling is not permitted.

ISLA responded to the EC Consultation agreeing with measures to increase the ELTIF liquidity profile including reduction of the percentage to be invested in eligible assets and redemption flexibility. It advocated for an increase in the level of permitted securities lending activity as part of long-term additional value and attractiveness, and also noted that both short selling and securities lending, as noted by ESMA in 2019, are key for price discovery and market liquidity.

Although this was not taken up in the final version of ELTIF II, ISLA continues to advocate on the benefits of securities lending practices and compatibility with long term investment strategies. The changes introduced by the ELTIF II framework are in line with ISLA’s ambitions to broaden the scope of application of the regime, which encourages adoption more widely.