Does ELTIF 2.0 fulfill its promise?

Beyond the buzzword: What makes ELTIF 2.0 a key differentiator compared to existing retail funds?

What makes ELTIF 2.0 a key differentiator compared to existing retail funds?

Long-term funds shaping tomorrow

ELTIFs are dynamic investment tools designed to fuel the EU’s financial future by channeling capital into transformative alternative investment projects such as private equity, debt, infrastructure, and real estate. These funds are designed for the long game – projects that need time but can have a significant impact. ELTIFs are alternative investment funds (AIFs) that can be marketed to retail and professional investors with a pan-European label.

ELTIF 2.0: Revised and revamped

On 15 February 2023, the European Parliament voted in favor for the long-awaited reform of the ELTIF regulation. This new framework broadens the scope of eligible assets, providing greater flexibility and opportunities for structuring opportunities and optimizing returns.

One of the key enhancements of ELTIF 2.0 is the ease of access for retail investors to participate by lowering entry criteria and simplifying the rules. With more streamlined regulations across the EU, this update makes ELTIFs simpler to be marketed and managed, allowing ELTIF to be a dynamic tool for sustainable economic development in Europe.

ELTIFs in numbers*

Luxembourg has been one of the most active jurisdictions where ELTIFs are being set up.

126

Authorized ELTIFs (EU-wide)

90

Luxembourg ELTIFs

90Luxembourg
16France
11Italy
2Spain

Reference: ESMA34-46-101, "Register of authorized European long-term investment funds (ELTIFs)"

* As at 31 October 2024

Part II ELTIFs vs. classic Part II Funds: What sets them apart?

Aside from funds with the ELTIF-label, asset managers traditionally launched Part II UCI structured under the Luxembourg law of 17 December 2010 to raise funds from retail investors for alternative investments.

To understand the enthusiasm surrounding the ELTIF 2.0, it is key to first understand what differentiates the Part II with an ELTIF label from a classic Part II UCI (i.e. without the ELTIF label).

1Regulations

Marketing passport

A UCI Part II fund cannot be marketed to retail investors with the AIFM passport.
The UCI Part II with the ELTIF label benefits from a regulation allowing the fund managers to market ELTIFs across multiple jurisdictions (EU Marketing passport).

Investor reach

ELTIFs are designed to be accessible to a wider range of investors, including retail investors, potentially leading to broader capital mobilization compared to UCI Part II funds, which focus more on professional investors and sophisticated retail investors in Luxembourg or to the so-called semi-professional investor types in certain European jurisdictions.

Regulatory alignment

ELTIFs benefit from a streamlined regulatory process across the EU, whereas Part II funds might face more complex national regulations for cross-border activities especially when it comes to retail investors.

2Operations

From an operational perspective, ELTIF and UCI Part II Funds have some overlapping aspects, but each has unique requirements and areas where they are not compatible.
Additional requirements for ELTIFs (beyond UCI Part II) include inter alia: liquidity gates, liability tests, issuance, and redemption processes.

3Tax

UCI Part II funds are generally subject to an annual subscription tax at a rate of 0.05%.
ELTIFs Part II are exempt from subscription tax.

Key threats facing ELTIFs: What you need to know

Lock-up period - ELTIFs typically have long lock-up periods, which can deter investors who seek liquidity and flexibility.
Distribution - ELTIFs may not be as readily available or supported on distribution platforms, limiting their reach and accessibility
Valuation - Asset managers must adapt to the timing of the valuation. Daily NAV calculation can become a challenge.
Withholding tax - Fund taxation is a complex process that requires a thorough understanding of tax and custody documentation from the outset.