"Up to now ELTIFs were a missed opportunity. It was a good idea (with an unsatisfactory) framework illustrated by the limited number of EU ELTIFs registered," said Stephane Janin, head of global regulatory developments and public affairs at AXA Investment Managers in Paris.
There are 57 registered ELTIFs, according to the European Commission's latest data.
The commission hopes that the revisions, published on Nov. 25, will increase non-bank financing provided to European companies to facilitate the transition to a low-carbon economy, as well as aid the economic recovery from the coronavirus pandemic. In order to accelerate the flow of capital into transportation, construction and other projects, the commission is changing the types of assets and fund structures permitted under the rules by permitting co-investments and fund-of-funds strategies to be included in ELTIFs.
ELTIF managers will also be permitted to include a broader array of strategies under ELTIFs, for example, securitization strategies such as mortgages and loans, alongside infrastructure and real estate.
Finally, the changes will make ELTIFs more attractive to a wider group of managers on a pan-European basis, without having to spend extra resources by figuring out rules for different European countries, according to sources.
The commission's review is also changing rules for investors by making redemptions more flexible and reducing barriers to entry for retail investors.
"From our perspective, those granular changes are actually quite important," said Martin Bresson, public affairs director at Invest Europe, the European association for the private equity and venture capital industry, based in Brussels. Allowing co-investments by alternatives managers — currently prohibited because of a perceived conflict of interest — makes ELTIFs "fit much better with a wider audience of private equity managers because co-investments are what most of the private equity managers have in their business model," he said.
Mr. Bresson added that also permitting the inclusion of fund-of-funds strategies in ELTIFs will allow managers to launch a more diversified offering. "You put ELTIFs in a different place in the value chain if you exclude the fund of funds. By alleviating that restriction, we are making the ELTIF a much more interesting instrument," Mr. Bresson said.
Elona Morina, policy adviser in the regulatory policy team of the European Fund and Asset Management Association, based in Brussels, added that the commission's initial intention of creating ELTIFs as tools to invest in the European real economy by providing capital for long-term projects hasn't yet been fulfilled. But she said the recent proposed amendments will provide ELTIFs with "the necessary flexibility needed by alternative investment funds."
Ms. Morina said that the review will broaden the investible universe for managers and investors by allowing ELTIFs to invest in unlisted financial startup companies and a broader range of securitization strategies involving mortgages and personal loans, or structured finance.
And money managers in Europe are eagerly watching the regulatory changes.
Mr. Janin, who said that AXA has been active in asking the commission to change the regulation for the last four years, added that it is critical to add ELTIFs to help managers sell long-term alternative strategies on an EU single-market level — the way listed strategies are marketed across the continent via UCITS. "We were lacking an option to raise money on a pan-European level," he said.
Mr. Janin added that permitting co-investments is a definite improvement for the firm as well. "When we are launching funds, we are making use of ramp-up periods, and including entities of the same group will be a way to (ease) development of such funds if there is a co-investment opportunity between institutional investors that are part of our group and external investors. It's a very important improvement," he said.
Markus Pimpl, managing director within the client solutions team at Partners Group AG in Zurich, responsible for the firm's ELTIFs offering, added: "It is pretty clear that ELTIF is a fantastic idea but didn't result in the success everyone was expecting. We will see more managers coming to the market and you are seeing that more assets from private and institutional investors are being gathered. It is happening but it takes longer than everyone thought," he said.
Mr. Pimpl said that Europe has a shortage of private markets managers, but he thinks that with this review, the focus from global managers might shift to Europe because of a huge market opening up.
However, Mr. Pimpl warned that opening up ELTIFs to traditional managers was not helping to make ELTIFs safer for investors as the changes were sought by many money managers that don't have specific private markets capabilities or don't yet run ELTIFs themselves. "The regulation now opens up for fund of fund (investments), whereas before it was only direct investments," he said. The changes could allow for more public equity content in this regime, he said.
Partners Group didn't disclose how much it manages it ELTIFs.