Page Contents
Key Contacts
Related Services
On 19 July 2024, the European Commission (Commission) adopted a Delegated Regulation containing regulatory technical standards (RTS) supplementing the Regulation on European Long-Term Investment Funds (EU) (2015/760 as amended by Regulation (EU) 2023/606) (ELTIF Regulation), otherwise known as ELTIF 2.0.
ELTIF 2.0 has applied in all member states since 10 January 2024 introducing a revised and enhanced European framework for European long-term investment funds (ELTIFs). It aims to provide retail investors with greater access to alternative investment strategies and assets, particularly long-term, less liquid investments that fund the real economy. ELTIF’s are the only type of funds dedicated to long-term investments which can be distributed on a cross-border bases to both professional and retail investors. For further reading see our ELTIF 2.0 publication.
The RTS relate to Regulations 9(3), 18(6), 19(5), 21(3) and 25(3) of ELTIF 2.0, and are accompanied by Annex I and Annex II. Among other requirements, the RTS specify the way that certain key requirements apply, including the circumstances in which derivatives will be considered as solely serving the purpose of hedging risks, redemption policy and liquidity management tools (LMTs) requirements, the circumstances for the matching of transfer requests of units or shares, criteria for the disposal of ELTIF assets, and costs disclosures.
The RTS reflect the flexibility in the ELTIF Regulation to provide redemption facilities during the life of an ELTIF (‘open-ended’ with limited liquidity ELTIF). Below we highlight some of the key provisions of the RTS that apply to such open-ended with limited liquidity ELTIFs and other general provisions applicable to all ELTIFs.
Minimum holding period
The alternative fund manager (AIFM) of an ELTIF offering redemption facilities during the life of the ELTIF can choose to apply a minimum holding period.
Redemptions are not allowed before the end of a minimum holding period (if any) or before the date that portfolio composition and diversification rules are stated to apply in the prospectus.
In determining the duration of the minimum holding period, the AIFM must take account of the circumstances of the ELTIF by reference to the criteria set out in Article 3 of the RTS e.g. the long-term nature and investment strategy of the ELTIF, the underlying asset classes of the ELTIF, the investment policy, the investor base, the liquidity profile, the valuation procedures, whether the minimum holding period is consistent with the time necessary to complete the investment of the ELTIF’s capital contributions etc.
The ELTIF’s national competent authority (NCA) may request the AIFM to justify the appropriateness of the duration of the minimum holding period and its compatibility with the valuation procedures and redemption policy.
Redemption policy
Where an ELTIF offers redemption facilities during the life of the ELTIF, at the time of authorisation, the AIFM must provide the ELTIF’s NCA with the information set out in Article 4 of the RTS. This includes that it has a redemption policy which must contain:
Article 5 of the RTS contains further requirements that the redemption policy must have, such as redemption notice period (if any) and conditions and procedures for redemption requests.
Maximum size of redemptions
The RTS require that the redemption policy must also include the maximum percentage of liquid assets (UCITS eligible assets) that can be used to meet redemption requests, which the AIFM can calibrate based on either:
Under both options, the AIFM is required to apply the percentage of liquid assets that can be used for redemptions to the sum of: (a) liquid assets at the redemption date; and (b) the expected cash flows forecasted on a prudent basis over 12 months. For the purposes of (b) the AIFM must be able to demonstrate that there is a high degree of certainty that the expected cash flows will materialise, without including the possibility of new subscriptions.
If the calculations are based on Annex I of the RTS, the ELTIF is not required to hold a minimum percentage of liquid assets e.g. an ELTIF with a redemption frequency of three months and with a one-month notice period, can allow redemptions of a maximum of 27,3% of liquid assets on a redemption date.
If the calculations are based on Annex II of the RTS, the ELTIF is required to maintain a minimum percentage of liquid assets linked to redemption frequency e.g. an ELTIF with a redemption frequency of three months must maintain a minimum of 20% in liquid assets and can allow redemptions of up to 50% of the liquid assets on a redemption date.
If the AIFM opts to apply Annex II and the minimum percentage of liquid assets falls below the thresholds, it must, within an appropriate time, reconstitute the minimum percentage of liquid assets, while maintaining the ability of investors to redeem, taking account of the interests of investors.
For redemption notice periods of less than three months (including the extension of the notice period, if any), the AIFM must inform the ELTIF’s NCA and provide the reasons for such shorter notice period with an explanation of why the shorter notice period is consistent with the individual features of the ELTIF. An AIFM may however request an exemption from this requirement where the ELTIF can be solely marketed to professional investors.
Liquidity Management Tools
To offer redemption facilities during the life of an ELTIF, the AIFM must demonstrate that the ELTIF has an appropriate redemption policy and LMTs that are compatible with the ELTIF’s long-term strategy.
Under the RTS, the AIFM shall not be required to but may, at its discretion, select and implement one or more anti-dilution LMTs from:
Alternatively, the AIFM may also select and implement other LMTs – but it must have some LMTs. In such case, the RTS provides that the AIFM provide the ELTIF’s NCA, on request, with information on why, based on the features of the ELTIF, the three LMTs referred to above are not adequate for that ELTIF or why other LMTs would be more appropriate. As above, for ELTIFs marketed solely to professional investors, the AIFM can seek an exemption from this requirement.
Other provisions
The RTS set out common definitions, calculation methodologies and presentation formats of costs disclosures.
Derivatives use limited to hedging the risks inherent to ELTIF’s investments
Among other prohibited activities (e.g. short selling), ELTIFs are not permitted to use financial derivatives, except where their use solely serves the purpose of hedging the risks inherent to other investments of the ELTIF.
The RTS specify that the financial derivative should be economically appropriate for the ELTIF, consistent with the risk-profile of the ELTIF and aimed at a verifiable reduction of risks for the ELTIF. Further, the underlying assets of the financial derivative must be assets to which the ELTIF is exposed, or where not available, of the same or economically similar asset class.
Life of ELTIF consistent with individual assets of the ELTIF
ELTIFs (including open-ended with limited liquidity ELTIFs) must have a stated duration which should be consistent with the long-term nature of the ELTIF and compatible with the life-cycles of each of the individual assets, measured according to the illiquidity profile and economic life-cycle of the asset and investment objective.
The RTS sets out considerations for the AIFM to take in assessing whether the life of an ELTIF is compatible with the life-cycles of each of the individual assets of the ELTIF.
Matching of transfer requests
An ELTIF can (but is not obliged to) provide for the possibility of full or partial matching of transfer requests of units or shares by exiting investors with transfer requests by potential investors. Any such matching facility offered must meet the conditions set out in the ELTIF Regulation.
Among the conditions, the ‘matching’ policy must ensure that investors are treated fairly and that any mismatches are carried out on a pro rata basis. The RTS set out the minimum policy content requirement e.g. process, timing, matching window, dealing dates, settlement and pay-out, safeguards, notice period (if any).
Next steps
The Delegated Regulation adopted by the Commission is not final. It is now subject to a three-month scrutiny period by the European Parliament and Council. If no objections are made, the RTS can be expected to apply in Q4 2024, on the day following its publication in the Official Journal of the EU.
Industry’s engagement relating to its concerns with earlier versions of the RTS have been significantly addressed in the RTS adopted by the Commission. This is an important development, particularly for asset managers seeking to establish open-ended with limited liquidity ELTIFs. The CBI’s new ELTIF regulatory framework was established earlier this year for the authorisation of ELTIFs in Ireland by way of update to its AIF Rulebook with a new ELTIF chapter and associated application forms. Notably, the CBI recently communicated in a speech that it is available to discuss how an open-ended with limited liquidity ELTIF might be structured, pending the deliberations on the RTS at an EU level.
For more information on this topic, please contact any member of A&L Goodbody’s Asset Management and Investment Funds team.
Date published: 23 August 2024
