Funding long-term investment in the EU’s economy

SUMMARY OF:

Regulation (EU) 2015/760 on European long-term investment funds, as amended by Regulation (EU) 2023/606

WHAT IS THE AIM OF THE REGULATION?

Regulation (EU) 2015/760 sets out European Union (EU) rules for the authorisation, investment policies and operating conditions of European long-term investment funds (ELTIFs)*.
Amending Regulation (EU) 2023/606, which applies from 10 January 2024, introduces new rules regarding the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules, and the requirements pertaining to the authorisation, investment policies and operating conditions of ELTIFs. Their objective is to better facilitate the raising and channelling of capital towards long-term investments in the real economy, including towards investments that promote the European Green Deal and other priority areas, such as energy, transport and social infrastructure and job creation.

KEY POINTS

Regulation (EU) 2015/760 lays down uniform rules on the authorisation, investment policies and operating conditions of EU alternative investment funds (EU AIFs) or compartments of EU AIFs that are marketed in the EU as ELTIFs. This informal and non-exhaustive summary, that can not be deemed as an investment or legal advice, sets out the general set of normative rules that apply as of 10 January 2024.

Qualifying portfolio undertaking

A qualifying portfolio undertaking must, at the time of the initial investment, meet the following requirements:

is not a financial undertaking, unless:
- it is one that is not a financial holding company or a mixed-activity holding company, and
- it has been authorised or registered less than 5 years before the date of the initial investment;
is an undertaking which:
- is not admitted to trading on a regulated market or on a multilateral trading facility, or
- is admitted to trading on a regulated market or on a multilateral trading facility and has a market capitalisation of no more than €1,500,000,000;
is established in an EU Member State, or in a non-EU country provided that the country in question:
- is not identified as a high-risk non-EU country,
- is not mentioned in Annex I to the Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes.

Eligible investment assets

Assets are only eligible for investment by an ELTIF if they fall into one of several categories:

equity or quasi-equity instruments:
- issued by a qualifying portfolio undertaking and acquired by the ELTIF from that qualifying portfolio undertaking or from a third party via the secondary market,
- issued by a qualifying portfolio undertaking in exchange for an equity or quasi-equity instrument previously acquired by the ELTIF from that qualifying portfolio undertaking or from a third party via the secondary market,
- issued by an undertaking in which a qualifying portfolio undertaking holds a capital participation in exchange for an equity or quasi-equity instrument acquired by the ELTIF;
debt instruments issued by a qualifying portfolio undertaking;
loans granted by the ELTIF to a qualifying portfolio undertaking with a maturity that does not exceed the life of the ELTIF;
units or shares of one or several other ELTIFs, European venture capital funds (EuVECAs), European social entrepreneurship funds (EuSEFs), undertakings for collective investment in transferable securities (UCITS) and EU AIFs managed by EU AIF managers (EU AIFMs), provided that those entities invest in eligible investments and have not themselves invested more than 10% of their assets in any other collective investment undertaking;
real assets*;
simple, transparent and standardised securitisations where the underlying exposures correspond to one of the following categories:
- assets listed in Article 1, point (a)(i), (ii) or (iv) of Delegated Regulation (EU) 2019/1851, or
- assets listed in Article 1, point (a)(vii) or (viii) of Delegated Regulation (EU) 2019/1851, provided that the proceeds from the securitisation bonds are used for financing or refinancing long-term investments;
bonds issued, pursuant to Regulation (EU) 2023/2631 on European Green Bonds, by a qualifying portfolio undertaking.

An ELTIF should invest at least 55% of its capital in eligible investment assets.

Authorisation

An application to become an ELTIF must include:

the fund rules or instruments of incorporation*;
information on the identity of the proposed manager of the ELTIF and their current and previous fund management experience and history;
where the ELTIF can be marketed to retail investors, a description of the information to be made available to investors, including a description of the arrangements for dealing with complaints submitted by retail investors;
information on the identity of the depositary* and, where requested by the competent authority of an ELTIF that can be marketed to retail investors, the written agreement with the depositary;
a description of the information to be given to investors, including the arrangements for dealing with complaints submitted by retail investors;
additional information in the case of master*-feeder* structures of ELTIFs.

The regulation also lists the documentation that an EU AIFM applying to manage an ELTIF established in another Member State must provide to the competent authority of the ELTIF.

To apply and to get authorisation, fund managers themselves must be authorised under Directive 2011/61/EU (see summary).

The European Securities and Markets Authority keeps a central public register of each authorised ELTIF, along with its respective manager, competent authority, dates of authorisation and of when marketing of the ELTIF commenced, etc.

Liability

Managers are responsible for ensuring compliance with the regulation and for any infringement. They are also responsible for any losses or damages which result from non-compliance.

Investment policy

ELTIFs are subject to specific investment rules.

They must invest at least 55% of their capital in eligible assets.
The above investment limits do not apply to ELTIFs solely marketed to professional investors.
As a general rule, an ELTIF can invest no more than:
- 20% of its capital in instruments issued by, or loans granted to, any single qualifying portfolio undertaking;
- 20% of its capital in a single real asset;
- 20% of its capital in units or shares of any single ELTIF, European venture capital fund, European social entrepreneurship fund, undertaking for collective investment in transferable securities or EU AIF managed by an EU AIFM; and
- 10% of its capital in assets, where those assets have been issued by any single body, but an ELTIF may raise the 10% limit to 25% where bonds are issued by a credit institution that has its registered office in a Member State and that is subject by law to special public supervision designed to protect bondholders.
The aggregate value of simple, transparent and standardised securitisations in an ELTIF portfolio cannot exceed 20% of the value of the capital of the ELTIF.
The aggregate risk exposure to a counterparty of the ELTIF stemming from over-the-counter derivative transactions, repurchase agreements or reverse repurchase agreements shall not exceed 10% of the value of the capital of the ELTIF.

The assets and cash borrowing position of ELTIFs must be combined with those of the collective investment undertakings in which ELTIFs have invested in order to assess ELTIFs’ compliance with the portfolio composition and diversification requirements, and with the borrowing limits (see below).

Borrowing of cash

An ELTIF may borrow cash provided that such borrowing represents no more than 50% of the net asset value of the ELTIF in the case of ELTIFs that can be marketed to retail investors, and no more than 100% of the net asset value of the ELTIF in the case of ELTIFs marketed solely to professional investors.
The ELTIF’s manager must specify in the prospectus of the ELTIF whether the ELTIF intends to borrow cash as part of its investment strategy and, if so, must also specify therein the borrowing limits.

Redemption of units or shares of ELTIFs

Investors in an ELTIF cannot request the redemption of their units or shares before the end of the life of the ELTIF. Redemptions to investors are possible as from the day following the date of the end of the life of the ELTIF.
The rules or instruments of incorporation of the ELTIF must clearly indicate a specific date for the end of the life of the ELTIF, and may provide for the right to temporarily extend its life and the conditions for exercising that right.
By way of derogation, the rules or instruments of incorporation of an ELTIF may provide for the possibility of redemptions during the life of the ELTIF if certain conditions are met.
The life of an ELTIF must be consistent with the long-term nature of the ELTIF and must be compatible with the life cycles of each of the individual assets of the ELTIF, measured according to the illiquidity profile and economic life cycle of the asset and the stated investment objective of the ELTIF.
Investors must always have the option to be repaid in cash. Repayment in kind from the assets of the ELTIF must only be possible under certain conditions.

Protection of retail investors

In order to ensure a high level of retail investor protection, a suitability assessment must be carried out irrespective of whether the units or shares of ELTIFs are acquired by retail investors from distributors or managers of ELTIFs or via the secondary market.

The distributor or, when directly offering or placing units or shares of an ELTIF to a retail investor, the manager of the ELTIF must issue a clear written alert informing the retail investor about the following:

where the life of an ELTIF that is offered or placed to retail investors exceeds 10 years, that the ELTIF product might not be fit for retail investors that are unable to sustain such a long-term and illiquid commitment;
where the rules or instruments of incorporation of an ELTIF provide for the possibility of the matching of units or shares of the ELTIF, that the availability of such a possibility does not guarantee or entitle the retail investor to exit or redeem their units or shares of the ELTIF concerned.

FROM WHEN DOES THE REGULATION APPLY?

Regulation (EU) 2015/760 has applied since 9 December 2015.
Amending Regulation (EU) 2023/606 has applied since 10 January 2024.

BACKGROUND

Evaluations, carried out by the European Commission in consultation with the European Securities and Markets Authority, showed that the ELTIF market had not scaled up as expected, with only a low number of funds, a small net asset size, a limited number of jurisdictions in which ELTIFs were domiciled and portfolio composition largely skewed towards a certain eligible investment category. The Commission’s 2020 communication launching a new action plan for the capital markets union cited the need to ensure that more investments are channelled towards businesses requiring capital and to long-term investment projects, particularly during the recovery from the COVID-19 pandemic.

For further information, see:

Investment funds (European Commission).

KEY TERMS

European Long-Term Investment Funds (ELTIFs). ELTIFs are designed to provide long-term capital to infrastructure, small and medium-sized enterprises (SMEs), and real estate projects. These funds benefit from a European passport allowing them to be marketed to both retail and professional investors. They are governed by strict rules regarding their investment policies and marketing activity, ensuring strong safeguards for investors.

Real assets. An asset that has intrinsic value due to its own substance and properties such as property for real estate.

Instruments of incorporation. Formal documents filed with a government body to legally document the creation of a company.

Depositary. A bank or company, regulated under the alternative investment fund managers directive (AIFMD), which is responsible for the safekeeping of assets, monitoring cash flows and overseeing the operations of alternative investment funds to enhance investor protection, among other functions.

Master ELTIF. An ELTIF, or an investment compartment, in which another ELTIF invests at least 85 % of its assets in units or shares.

Feeder ELTIF. An ELTIF, or an investment compartment, which has been approved to invest at least 85 % of its assets in units or shares of another ELTIF or investment compartment of an ELTIF.

MAIN DOCUMENT

Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (OJ L 123, 19.5.2015, pp. 98–121).

Successive amendments to Regulation (EU) 2015/760 have been incorporated into the original text. This consolidated version is of documentary value only.