The Recast ELTIF: Opening Of Private Market Investments For Retail Investors In Europe

An amending regulation to the European Long-Term Investment Funds Regulation (Revised ELTIF Regulation) applies from 10 January 2024. The aim of the Revised ELTIF Regulation is to encourage long-term investments in the real economy, which includes listed and unlisted private companies, infrastructure projects, and real estate that may require long-term capital investment. ELTIFs have the potential to address financing required for environmentally sustainable investments. The Revised ELTIF Regulation provides retail investors in the EU an opportunity to invest in private market investments and infrastructure funds, which to date was not available to the retail market.

ELTIFs In Ireland

The Central Bank of Ireland (Central Bank) has introduced a new chapter in its AIF Rulebook. The ELTIF chapter sets out the domestic supervisory and reporting requirements application to Irish-domiciled ELTIFs. From 11 March 2024, the Central Bank is open to applications for authorisation of closed-ended ELTIFs. Ireland has not ‘gold-plated’ the Revised ELTIF Regulation, which is to say it has not implemented domestic rules that supplement the Revised ELTIF Regulation.

The Revised ELTIF Regulation distinguishes between ELTIFs that may be distributed to retail investors and ELTIFs that may be distributed professional investors.

Professional and Qualifying Investor ELTIFs are restricted to professional clients within the meaning of Annex II of MiFID Directive. Retail Investor ELTIFs may be distributed to retail investors, and there is no minimum subscription requirement. There is a different set of product rules that apply to each category of ELTIF.

Unique Features Of The ELTIF Regime

Umbrella Schemes

The Central Bank permits ELTIFs to be established as an umbrella fund structure that has a mix of both ELTIF and non-ELTIF funds. This flexibility provides managers with the option of adding an ELTIF fund to an established umbrella, thereby benefitting from existing infrastructure. A Retail Investor ELTIF is required to be established within a Retail Investor umbrella fund, and a Professional or Qualifying Investor ELTIF is restricted to being established within a Qualifying Investor umbrella fund.

Authorisation Process

Professional and Qualifying Investor ELTIFs are subject to a 24-hour Qualifying Investor Alternative Investment Fund (QIAIF) authorisation process by the Central Bank. Retail Investor ELTIFs are subject to the prior review of the Central Bank.

Choice Of Irish Vehicles

In Ireland, an ELTIF may be established as one of the following:

• Irish Collective Asset-management Vehicle.
• Investment Limited Partnership.
• Unit Trust.
• Common Contractual Fund.
• Variable Capital Investment Company.

Uniform Set Of EU Product Rules

The changes introduced by the Revised ELTIF Regulation are aimed at making ELTIFs more attractive to investors as a vehicle for long-term investment in the real economy. As summarised below, the key changes for retail investors include much broader scope of eligible investments and less prescriptive diversification requirements.

Liquidity Management

ELTIFs are generally structured as closed-ended funds and therefore are required to have a limited duration. The duration of an ELTIF should be long enough to cover the ELTIF’s investment objective and the life cycle of each of its assets.

An ELTIF that is open-ended (or a closed-ended ELTIF that permits redemptions during its term) is required to have appropriate redemption policies and liquidity management tools, that are compatible with the long-term investment strategy of the ELTIF.

The European Securities and Markets Authority (ESMA) has proposed technical standards in relation to liquidity management which are designed to ensure that the life cycle of an ELTIF is compatible with the ELTIF’s redemption policies. The rules regarding liquidity management will require AIFMs to adopt detailed liquidity management processes. The EU Commission will consider the technical standards proposed by ESMA and it is hoped that the clarifying requirements will be applicable from Autumn 2024.

Authorisation Process

Irish Qualifying/Professional Investor ELTIFs are subject to a 24-hour authorisation process by the Central Bank, therefore if an application to authorise an ELTIF is submitted to the Central Bank by 12 noon on a business day, the ELTIF will be authorised by the Central Bank on the following business day.

The procedure for the authorisation of Retail ELTIFs involves Central Bank’s review of certain core fund documents principally the prospectus. The Central Bank has 20 working days from the date of the initial submission of an application to issue comments. Once those comments are received and responded to, the Central Bank has ten working days to review the responses and issue any additional comments. This review process continues until the Central Bank confirms that it has no further comments, at that stage the AIFM may apply to the Central Bank for the authorisation of the Retail ELTIF.

Taxation Of ELTIFs

Fund Level Taxes

ELTIFs are subject to Ireland’s favourable tax regime for investment funds. ELTIFs are exempt from Irish tax on income and gains derived from their investment portfolios and are not subject to any Irish tax on their net asset value. Furthermore, ELTIFs do not charge any withholding taxes on payments to investors, and no stamp or capital duty is payable in Ireland on the issue, transfer, repurchase, redemption of units/shares in an ELTIF.

Withholding Taxes

No Irish withholding taxes apply to the payment of dividends or distributions to investors who are not resident in Ireland and have provided the ELTIF with the appropriate tax residence declaration. The payment of redemption proceeds, returns of capital or payments in relation to the encashment, cancellation or transfer of units to non-Irish resident investors are also exempt from Irish withholding taxes.

Treaty Access

Ireland has an extensive network of double taxation treaties and the Irish tax authorities consider that ELTIF (other than investment limited partnership and CCFs) are generally entitled to the benefit of Ireland’s extensive tax treaty network. The availability of treaty benefits may enable ELTIFs to avail of reduced rates of foreign withholding tax that would otherwise apply to the holding of foreign assets.  Dividends, interest and capital gains that an ELTIF receives with respect to its investments may be subject to foreign taxes, including withholding taxes, however, the availability of treaty benefits may enable an ELTIF to avail of reduced rates of foreign withholding tax that would otherwise apply to the holding of foreign.

Distribution To Professional And Retail Investors In The EU

ELTIFs benefit from the marketing passport under AIFMD and therefor an ELTIF that is established in Ireland may be sold cross border in another EEA member state without the need for additional authorisation. The procedure for the notification of the marketing of the ELTIF requires the AIFM to submit a marketing notification and supporting documentation to the Central Bank or CSSF. Once a complete notification is received, the AIFM’s regulatory authority will review the notification, and will forward this notification to the host state regulator within ten working days, when marketing may commence.

Distribution To Retail Investors

The Revised ELTIF Regulation introduces significant changes that will make it easier to distribute to retail investors, which include the following:

Removal of local facilities agent: Under the Revised ELTIF Regulation there is no longer a requirement to put in place local facilities in each EU Member State where the ELTIF is marketed. The removal of the requirement for a local facilities agent is expected to significantly reduce the costs of marketing to retail investors.

Removal of minimum investment requirement: Retail investors are not subject to a minimum investment requirement ie the minimum investment requirement of €10,000 per investor and the requirement that no more than ten per cent of a retail investor’s investment portfolio be invested in any one ELTIF has been removed.

Simplified suitability assessment: ELTIFs are permitted to be distributed to retail investors provided the AIFM applies a product governance process to ensure that the ELTIF is distributed to the relevant target market and the AIFM carries out a suitability assessment and determines that the ELTIF is suitable for retail investors in accordance with Article 25(2) of MiFID II.

Importantly, the Revised ELTIF Regulation clarifies that a suitability assessment may be overridden if the AIFM obtains the explicit consent from the investor that it understands the risk of the investment and it acknowledges that the investment may not be suitable for it. In addition, the Revised ELTIF Regulation no longer requires the AIFM or relevant distributor to provide ‘investment advice’ to retail investors, as required under the original ELTIF Regulation.

A New Era?

The success of Ireland as a fund domicile was largely built upon the success of the UCITS product and its ability to access European markets. From its inception, few, if any, would have thought that the original UCITS Directive (Directive 85/611/EEC which was implemented by Ireland in the early 1990s) would have had such a profound impact on shaping the investment landscape in Europe. It’s too early to speculate on the what the impact of Revised ELTIF Regulation will be, but it’s been fascinating for our European investment funds team to be involved in discussions and submissions with regulators on the features of the ELTIF regime.

The recast ELTIF significantly broadens the investment opportunities for retail, it lowers the investment threshold for retail investors, and is more accessible to a wider range of retail investors. If the evolution of UCITS Directive is anything to go by, the impact of recast ELTIF may be profound, and we may very well look back at this time as a new era when private market investments were genuinely made available for retail investors in Europe.

Conor Durkin
Conor Durkin is head of Pinsent Masons' Investment group in Ireland. He specialises in investment funds and asset management.