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Brussels, 26 June 2013
European Long-term Investment Funds - frequently asked questions
1. What is a European Long-term Investment Fund?
The proposed European Long-Term Investment Fund, or ELTIF, is a new type of collective investment framework allowing investors to put money into companies and projects that need long-term capital. It is aimed at investment fund managers who want to offer long-term investment opportunities to institutional and private investors across Europe, e.g. in infrastructure projects. To benefit from this cross-border passport the new Funds would have to meet rules designed to protect both investors and the companies and projects they invest in.
2. Why are they necessary?
ELTIFs are designed to increase the amount of non-bank finance available for companies investing in the real economy of the European Union. Action is needed at European level as there is no consistency among the funding vehicles in Member States, where they exist. It is also not always clear whether such funds are really focused on long-term investments such as infrastructure projects. Existing funds can only raise money in one Member State as they are not accepted across national borders. This fragmentation means the growth of funds is limited.
3. How would the ELTIF rules work?
To qualify as an ELTIF, funds would:
4. What exactly can they invest in and why just 70%?
ELTIFs can only invest in unlisted companies needing long-term capital, real assets that need long-term capital to develop them, European Venture Capital Funds (EuVECA), and European Social Entrepreneurship Funds (EuSEF).
Because of the long-term nature of the assets they will invest in, it may take ELTIFs a number of years to fully invest all of the money in the fund. The rules should not force ELTIFs to invest in assets that are not suitable just to meet a deadline. So ELTIFs will have up to five years to invest at least 70% of the money. They can have 30% in other assets. This is to provide the ELTIFs with some flexibility regarding when to sell assets or replace them with new ones. The 30% buffer can be held in assets that would be eligible for a UCITS fund (see below). This is to prevent ELTIFs from holding risky assets.
5. Who can offer an ELTIF?
Only managers who are authorised under the Alternative Investments Fund Managers Directive (AIFMD) can offer an ELTIF. The AIFMD puts in place a stringent set of rules for anyone managing alternative investment funds. These requirements stipulate that key personnel must be ‘fit and proper’. They also include requirements on depositaries, valuation, mechanisms to deal with conflicts of interest and disclosure of information to investors. As an ELTIF is not a UCITS fund it is an AIF and so its manager must be authorised under the AIFMD.
6. Who will want to invest in an ELTIF?
There will be a wide audience. Pension funds and insurance companies that need to find assets that pay a steady, reliable income to meet the promises they have made to their savers and policyholders will be attracted to ELTIFs. ELTIFs are also likely to appeal to smaller investors, including retail savers, who can afford to have some of the money invested for a number of years in return for a steady income or a lump sum at the end. Investors should only put money into an ELTIF if they are completely sure they won't need it for that time. That is why the fact that they can't get their money back until the end has to be disclosed very clearly and there is a recommendation that investors should only commit a proportion of their savings to an ELTIF.
7. How can we be sure retail investors will understand their money is locked up?
If an ELTIF is marketed to retail investors, it would be a Packaged Retail Investment Product (PRIP) and so subject to the requirement to have a key information document or KID explaining its features and its risks. The KID will be a two or three page document that will set out in plain language what the most important feature of the PRIP is and what its risks are. For an ELTIF, one of the most important risks that will be clearly explained will be that any investment is locked away for the life of the ELTIF. The PRIPs proposal is currently undergoing scrutiny by the Council and the European Parliament.
8. How can we be sure ELTIFs are sold to the right people?
In addition to the information requirements described above, ELTIFs are investment products that come under the requirements of the Markets in Financial Instruments Directive (MiFID). In practice anyone selling an ELTIF will have to assess its suitability in relation to the financial needs of the person they are offering it to. This will require them to understand whether, for example, a retail investor can really afford to lock part of his or her savings away for the life of the ELTIF.
9. Why can't investors get their money back whenever they want?
The point about these funds is that the money is committed for the long term. Companies and projects receiving finance need to be confident that the money they expect to be able to use for many years won't suddenly be clawed back from them because some investors have decided the fund is no longer for them. On the other hand, investors will potentially be able to obtain an 'illiquidity' premium compensating them for their patience. In addition, we expect to see a secondary market emerge that would give some investors the chance to sell their units or shares during the life of a fund.
10. Why let retail investors in at all? They can't invest in the European Venture Capital (EuVECA) and European Social Entrepreneurship Fund (EuSEF) which seem just as risky as ELTIFs.
The European Venture Capital (EuVECA) and European Social Entrepreneurship Fund (EuSEF) regulations both set the minimum investment at €100 000. These two types of funds, which will be available from 22 July 2013, are targeted at a very different set of more specialist investors who do not mind investing in highly risky start-ups. ELTIFs will be subject to a set of consumer protection rules, such as diversification requirements, limits on leverage or a ban on short-selling. Consequently, LTIFs are much more suitable for retail investors. ELTIFs are therefore expected to collect much more capital than EuVECAs or EuSEFs.
11. Will EU money go into ELTIFs?
No. ELTIFs provide a framework for private money, from institutional or individual investors, to be channelled into companies and projects that are not listed on a stock exchange. ELTIFs will not be eligible for any kind of grant money available from European institutions. That does not prevent ELTIFs from investing in companies and projects that have received that kind of funding as well (co-financing).
12. How big is the market at the moment?
This is hard to assess precisely because the market is so fragmented. However, it is possible to make some estimates. For infrastructure transaction volumes have been stable at between €100 and €150 billion each year since 2007, indicating a consistent demand for financing. While the size of the property fund market is similarly difficult to assess, one estimate puts it at €258 billion while the value of aircraft that have been ordered but not yet delivered is put at $700 billion worldwide. (All of these figures are in the Impact Assessment.)
13. How much demand is there for ELTIFs?
An estimated €1 500 to €2 000 billion will be needed to finance infrastructure project needs alone in Europe up to 2020. This indicates a need for large-scale financing. The impact assessment work that has led to the development of ELTIFs showed a clear appetite from industry to be able to offer ELTIFs to the widest possible audience. (All these figures are in the Impact Assessment).
14. How much ELTIF business is expected to be cross-border?
This is hard to estimate. UCITS are also sold cross border and its experience shows that some 20% are sold on a cross-border basis. This is the nearest comparison available.
15. How is UCITS different?
The guiding principle behind the UCITS Directive is that investors in funds authorised under it can get their money back at any time. On this basis, the fund framework that UCITS has created is entirely based on listed securities that can be sold on a regulated market at any time.
16. Will any burden be imposed on Member States?
It is important to remember that this is a regulation and so directly applicable to Member States. On that basis there is no need for Member States to transpose it into their national laws. However, the proposal will impose some limited requirements on supervisory authorities in Member States which will depend on whether they are the home country where the manager creating and marketing the ELTIF is based or another Member State in which the ELTIF is being sold (the host country):