Background
Regulation (EU) 2023/606 of 15 March 2023 (the “ELTIF 2.0”) entered into force on 10 January 2024. These awaited amendments to the ELTIF Regulation (EU) 2015/760 (the “ELTIF Regulation”) were expected to combine the best of different investment fund types- professional and retail, open and closed-ended - into one 'fit for all purpose' vehicle. ELTIF 2.0 aimed at striking a fine liquidity balance, in order to reconcile the presence of retail investors with a wider array of eligible illiquid assets. However, ever since the adoption of the final text, market players have expressed particular concerns in relation to its impact on open-ended ELTIFs. Liquidity requirements, liquidity management tools (LMTs), notice periods and cost disclosures have been in the spotlight since the European Securities and Markets Authority (ESMA) submitted the first draft Regulatory Technical Standards (RTS) to the ELTIF Regulation in December 2023.
Key Changes Proposed by the Commission
Removal of ex post notification of material changes to redemption policy
The draft RTS provided for three business days from the date of the material change in the redemption policy to notify the ELTIF national competent authority of such changes. The Commission does not believe that ELTIIF managers can make such changes without prior authorization from the national competent authority.
Minimum notice periods for redemptions
The draft RTS provided for a notice period for redemptions of at least 12 months for all ELTIFs, unless they meet a minimum asset liquidity threshold. The Commission considered this approach arbitrary and not considerate enough of the specific characteristics of each of the relevant ELTIF portfolios. The Commission therefore recommended that the minimum notice period of 12 months be removed as a condition for all ELTIFs.
Liquidity requirements related to standardised notice periods
One of the proposals of the draft RTS was the calibration of the redemption notice period for the ELTIF based on the liquid basket of assets of the fund and taking into account the maximum amount of redeemable assets as set out in the proposed table in article 5(6) of the RTS. The Commission considered that requiring the simultaneous application of both of these requirements (minimum percentage of liquid assets and maximum percentage that can be redeemed) fails to consider the individual situation of each ELTIF.
The Commission gave the following illustration of the application of the proposed article 5(6): “an ELTIF with a quarterly redemption frequency and a 2% gate would limit the redemptions up to 8% each year. However, the draft RTS proposed by ESMA would force such an ELTIF to maintain at least 40% of the ELTIF’s portfolio in liquid assets”. This would clearly hamper ELTIFs pursuing certain investment strategies, such as real estate, infrastructure, and private equity.
The Commission also noted the problem of cash drag brought on by the proposed liquidity requirements and more general concerns about their capacity to finance long-term initiatives. It has recommended that ESMA review these clauses and make reasonable adjustments that consider the unique characteristics of each ELTIF.
Liquidity management tools (LMTs)
The draft RTS used a more constrained approach to LMTs than was envisaged under ELTIF 2.0 by mistakenly emphasizing swing pricing, redemption fees, and anti-dilution charges as the necessary LMTs. Once more, this strategy was rigid, did not take into consideration the unique characteristics of various ELTIFs, and was inconsistent with the strategy used for other alternative investment funds (AIFs).
Redemption Gates
The draft RTS obliges ELTIFs to link redemption gates to the notice period or the size of liquid assets and to establish redemption gates in certain special situations. According to the Commission, this is not compatible with the possibility of allowing redemption within the minimum limits of liquid assets during the operational period of the ELTIF. It sets additional requirements in addition to those set out in the ELTIF Regulations.
Common definitions, calculation methodologies and presentation formats of costs
The Commission identified a number of deficiencies in the approach to costs disclosures proposed by ESMA, essentially requiring better alignment of the rules with the PRIIPs Regulation, MiFID and the AIFMD.
Conclusions
From a market practice perspective, ESMA’s draft RTS were lacking what the industry was expecting.
The Commission’s intervention is welcomed, but there are other challenges ahead for ELTIF 2.0 such us to create an efficient investment product that can boost European long-term investments in the real economy with fewer mandatory regulations and to alleviate barriers for retail investors to invest in such EU based alternative investment fund.
Share on
