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In June 2013, the European Commission proposed a regulation on European long-term investment funds, ELTIFs for short. Is this just another acronym or could it have real value for promoters of infrastructure and real estate development projects?
The Commission identified a funding gap for projects regarding transport infrastructure, sustainable energy generation or distribution, social infrastructure (education, housing or hospitals) and roll-out of new technologies and systems that reduce use of resources and energy. The proposed regulation is intended to provide an additional source of finance to such projects and also real assets that require significant up-front capital expenditure, meaning €10 million or more.
An ELTIF will be a new type of EEA authorised fund that can be marketed to retail investors, with managers of an ELTIF having a marketing 'passport', similar to that for a UCITS. It must have a fixed life and investors must commit to holding their investment for the life of the fund with no redemption rights. However, an ELTIF may be listed, allowing investors to trade their investment in the secondary market.
After a five year transitional period, an ELTIF must have:
The balance of the ELTIF's assets must be invested in more liquid, lower risk assets. Borrowing is restricted to 30% of the capital of the ELTIF, must be non-recourse and used only to acquire eligible investment assets.
ELTIFs will be subject to diversification requirements and must run for a specified period of time, during which investors have no redemption rights. Derivatives may only be used to hedge currency risk and not for speculation. Short selling, stock lending and exposure to commodities is prohibited.
Although investors would have no redemption rights, they would be permitted to sell or transfer their shares or units during the life of the ELTIF. The Regulation specifically envisages that shares or units in an ELTIF may be listed on a regulated market or traded on a multilateral trading facility. If the Regulation is passed in its current form, a listed ELTIF could be marketed to retail investors across borders.
The jury will be out as to whether, in the words of the Commission, "ELTIFs will be subject to a set of consumer rules, such as diversification requirements, limits on leverage and a ban on short-selling [and] consequently ELTIFs are much more suitable for retail investors".
If marketed to retail investors, an ELTIF will not be permitted to take the preferred private equity model of a partnership. It would be a packaged retail investment product (PRIP) and would require a key information document (KID) explaining its features and its risks. It would be classified as a complex product under the Markets in Financial Instruments Directive and the suitability assessment requirements may well deter advisers from recommending ELTIFs to their retail clients. However, ELTIFs that are listed will be available to execution-only clients.
There are already a number of London listed infrastructure funds and so it remains to be seen whether the marketing passport offered by the ELTIF will add real value. In their FAQs, the Commission believes that ELTIFs are likely to appeal to small investors as well as pension funds and insurance companies, so they may offer an opportunity to increase investment in the real assets sector.
The timing on implementation of ELTIFs is uncertain and ESMA  will be required to draft regulatory technical standards on several important points. On 22 October 2013, the European Parliament updated its procedure file to indicate that Parliament will consider the proposed Regulation in its plenary session to be held from 24 to 27 February 2014. Watch this space!
 European Securities and Markets Authority
For more information please contact Victoria Younghusband, Partner
T: + 44 (0)20 7427 6707