On 26 June 2013, the European Commission issued draft regulations (Regulations) that proposed a new type of collective investment framework allowing investors to put money into companies and projects that require long-term capital. The European Commission proposal seeks to achieve the general objectives of (i) increasing the means for long-term financing across all sectors of the European economy and (ii) improving the coherence of the single market.
The proposed new type of collective investment framework, the European Long-Term Investment Fund (ELTIF), would be structured as an alternative investment fund (AIF) as defined in the Alternative Investment Managers Directive (AIFMD) and be available for investment to all types of investor across Europe subject to certain requirements. These include requirements in respect of the types of long-term assets in which the ELTIF could invest and the firms that the ELTIFs would be permitted to invest in (infrastructure, transport and sustainable energy projects), how the ELTIF would be required to spread its assets to reduce risks and the information provided to investors.
The proposed ELTIFs are designed to meet the needs of institutional and private investors who are prepared to see their money tied into long-term assets (such as infrastructure projects) in return for a steady income. The European Commission anticipates that pension funds and insurance companies would be particularly interested in ELTIFs and also potentially private investors who can afford to see some of their savings committed for a long period of time.
The aim of the ELTIF framework is to create a ‘second retail passport’ that follows the UCITS approach on product specifications and risk spreading. The ELTIF would be required to meet rules designed to protect both investors and the companies and projects they invest in, in order to benefit from this cross-border passport.
Overlap with current EU Legislation
Pursuant to the draft Regulations, ELTIFs will be categorised as investment products within the meaning of the Markets in Financial Instruments Directive (MiFID) and would therefore be subject to all of the requirements of that directive in relation to marketing, selling and disclosure. In addition to the disclosure requirements contained in MiFID and the transparency requirements contained in AIFMD, ELTIFs would be required to publish a prospectus which would include all information required to be disclosed by collective investment undertakings of the closed-end type in accordance with the Prospectus Directive. In addition to the requirement to publish a prospectus, the ELTIF would be considered a Packaged Retail Investment Product (PRIP) and as a result would be subject to the requirement to have a key information document (similar in format to the Key Investor Information Document required under UCITS IV) explaining the features and its risks.
Pursuant to the draft Regulations, only EU AIFs would be eligible to become an authorised ELTIF and only if it is managed by an EU AIFM - UCITS and non-EU AIFs (and EU AIFs with a non-EU AIFM) would not be eligible for authorisation and marketing as ELTIFs.
Asset allocation requirements
Pursuant to the draft Regulations, ELTIFs would be required, within five years’ of authorisation, to invest at least 70% of their capital in non-transferable securities and securities which are generally illiquid and require commitments for a certain period of time, and have an economic profile of a long-term nature. Managers of ELTIFs would be permitted to invest up to a maximum threshold of 30% of their capital in assets other than long-term investments. ELTIF would be prohibited from partaking in the short-selling of assets, entering into securities lending agreements and investing in commodities and financial derivative instruments (other than for the purpose of hedging the duration and currency risk of the other assets). An ELTIF would be permitted to borrow cash amounting to up to 30% of the capital of the fund, however the draft Regulations provide that the ELTIF should only borrow in the currency in which the manager expects to acquire the asset.
Due to the illiquid nature of ELTIF investments in long-term projects, ELTIF are precluded from offering regular redemptions to their investors and investors shall not be able to withdraw money until the specified end date of their investment. However, ELTIFs would be subject to product rules designed to ensure sufficient diversification, address potential conflicts of interest, increase transparency as regards costs and limit the use of derivatives and leverage.
The draft regulations are currently in the early stages of drafting and we await further developments.
Elaine Keane is a Partner in the Investment Funds Unit at A&L Goodbody. Elaine specialises in the legal and regulatory issues surrounding the establishment, authorisation, operation and maintenance of Irish regulated funds with strong expertise in the establishment of complex, structured and index based UCITS funds for asset managers and investment banks. Elaine advises on traditional UCITS funds, exchange traded funds and open and closed-ended non-UCITS funds. She also advises service providers to such funds.
Shane Coveney is a Solicitor in the Investment Funds Unit at A&L Goodbody and provides advice to a broad spectrum of clients in respect of legal and regulatory issues surrounding the establishment, authorisation, operation and maintenance of regulated funds in Ireland.
A&L Goodbody is a full service Irish corporate law firm, with offices in Dublin, Belfast, London, New York and Palo Alto. Our Investment Funds team is a top ranked, experienced and dynamic group of specialists, offering a comprehensive legal, regulatory and taxation service to clients. We have been at the forefront of the Investment Funds industry in Ireland since its inception. Our clients include international investment banks, asset managers, investors in funds, fund administration groups, global custodians, prime brokers and other financial services organisations. For more information, please visit www.algoodbody.com