Regulatory Technical Standards (RTS)
On 19 July 2024, the European Commission adopted the Delegated Regulation for ELTIF 2.0 which sets out the revised RTS. These are now with the European Parliament and the Council of the EU to review and agree. Its expected that they will be published in the Official Journal in Q4 2024, entering into force the day after publication.
Background
The European Securities and Markets Authority (ESMA) had published its Final Report on draft RTS under the revised ELTIF Regulation in December 2023. Within this was feedback from their consultation earlier in 2023.
The draft regulatory technical standards (RTS) covered:
- the circumstances in which the life of a European long-term investment fund (“ELTIF”) is considered compatible with the life cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF;
- the circumstances for the use of the matching mechanism, i.e. the possibility of full or partial matching (before the end of the life of the ELTIF) of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with transfer requests by potential investors; and
- the costs disclosure.
After a request in a letter from the European Commission in March 2024, ESMA gave, on 22 April 2024, its opinion on amendments to the ELTIF RTS.
On the RTS on redemption policy, and specifically on the calibration of the requirements relating to redemptions and liquidity management tools, ESMA acknowledged that there should be an appropriate balance between protection of retail investors and financial stability related objectives and the fact that ELTIFs should make an important contribution to the capital market union objectives. However, ESMA proposed striking that balance slightly differently from the EC.
On 29 May 2024, the European Commission consulted the Expert Group of the European Securities Committee (‘EGESC’) on the draft Commission Delegated Regulation. The majority of Member States’ experts that expressed their views supported the proposed draft Commission Delegated Regulation citing a range of legal and economic reasons.
Review of ELTIF regulations
The final text for the revised ELTIF was adopted by the European Parliament in mid-February 2023. This text was agreed in trilogues in October 2022 and approved in COREPER in early December 2022.
The revised ELTIF regulations were published in the Official Journal of the EU on 20 March 2023 and come into effect from 10 January 2024.
Capital Markets Union - Review of ELTIF regulations announced - November 2021
In November 2021 the European Commission adopted a package of measures to improve the ability of companies to raise capital across the EU; this included proposals that aim to enhance the attractiveness of the ELTIF vehicle for both professional and retail investors. The key provisions are:
Eligible Real Estate assets and investment strategies
The scope of eligible assets and investments is extended, with eligible real estate assets and investment strategies including:
Direct or indirect holdings of real assets should therefore be deemed to form a category of eligible assets, provided that those real assets have value due to their nature or substance. Such real assets comprise immovable property, communication, environment, energy or transport infrastructure, social infrastructure, including retirement homes or hospitals, as well as infrastructure for education, health and welfare support or industrial facilities, installations, and other assets, including intellectual property, vessels, equipment, machinery, aircraft or rolling stock, and immovable property.
Investments in commercial property, in facilities or installations for education, research, sports or development, or in housing, including in senior residents or social housing, should also be deemed to be eligible assets due to the capacity of such assets to contribute to the objectives of smart, sustainable and inclusive growth. To enable real investment strategies in areas where direct investments in real assets are not possible or uneconomical, eligible investments in real assets should also comprise investments in water rights, forest rights, building rights and mineral rights.
Structuring
Fund-of-fund strategies permissible via AIFs and UCITS, as well as existing vehicles, providing they:
- invest in eligible investments; and
- do not invest more than 10% of their capital in any other collective investment undertaking.
In addition, ELTIFs may utilise master-feeder structures.
Redemptions
ESMA will develop draft regulatory technical standards which would specify:
- the circumstances for redemptions in limited circumstances.
- the information that ELTIFs need to disclose to investors.
In addition, there will be a new rule to facilitate the provision of an optional liquidity window mechanism.
Marketing
The proposals align the ELTIF suitability test with the equivalent MiFID II test.
In addition, an ELTIF manager or distributor is no longer required to carry out a suitability assessment on portfolio managers/staff investing in the ELTIF.
Disclosures
ELTIF manager to provide:
- an annual statement on the aggregate charges of the feeder ELTIF and the master ELTIF; and
- a description of the tax implications of the investment into the master ELTIF for the feeder ELTIF
Governance
More flexibilities so ELTIF managers, affiliated entities and their staff may invest in an ELTIF and/or the same assets.
ELTIF managers must put in place organisational and administrative arrangements to identify, prevent, manage and monitor conflicts of interest and ensure such conflicts of interest are adequately disclosed.
Leverage
The new borrowing limits are:
- 100% for professional investors; and
- 50% for retail investors
In addition:
- There is flexibility to borrow in other currencies where currency risk is hedged.
- Encumbering of assets is permissible where it is part of the borrowing strategy, with 30% encumbrance requirement no longer applying.
- ELTIF managers need to provide a detailed outline of the ELTIF borrowing strategy and limits
Background information
ELTIFs legislation came into effect on 9th December 2015.
'ELTIFs: Real Estate Fund Managers Opportunity' written by Melville Rodrigues, member of the AREF Public Affairs Committee
EU Commission Factsheet on ELTIFs
Author
