A comprehensive guide to European long term investment funds

Application for authorisation of an ELTIF must be submitted to the competent authority of its home Member state.

Only an EU alternative investment fund manager authorised under Directive 2011/61/EU may apply to the competent authority of the ELTIF for approval to manage it.

The procedure differs based on whether the competent authority of the ELTIF is the same as that of the AIFM.

Only EU AIFs may apply to be authorised as ELTIFs.

The authorisation by the competent supervisory authority is a necessary prerequisite for the establishment of an ELTIF, regardless of the type of vehicle and legal form chosen. 

• professional
• retail

ELTIF 2.0 Regulation differentiates between funds marketed to retail investors and those marketed to professional investors (a combination of both is possible). The EU legislator acknowledges that retail investors and professional investors have different investment outlooks, risk perception and investment skills.

Some key points related to the distinction of professional vs retail ELTIF are:

• risk-diversification requirements apply to retail-investor ELTIFs
• retail ELTIFs allowed to borrow up to 50% of their NAV (no limit for non-retail)
• waived requirement of a EUR 10k entry ticket and the maximum of 10% exposure cap for retail investors whose portfolios are under EUR 500k

ELTIF eligible assets:

• Equity or quasi-equity instruments issued by a qualifying portfolio undertaking (as defined in the ELTIF 2.0 Regulation)
• 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 more ELTIFs, EuVECAs, EuSEFs, UCITS, and EU AIFs managed by EU AIFMs, provided those funds invest in eligible investments and have not themselves invested over 10% of their assets in other funds (not applicable to feeder ELTIFs)
• Real assets
• Certain STS securitisations
• EU green bonds
• Certain newly approved financial institutions (fintechs, for example)

Co-investment permitted for the AIFM and staff of the AIFM and undertakings belonging to the same group, if adequate conflicts of interest policy is in place.

ELTIFs should invest at least 55% of their capital in eligible investment assets.

Prohibited assets - ELTIFs cannot invest in assets where the ELTIF Manager has a direct or indirect interest. The only exception is if the interest is through holding units or shares in ELTIFs, EuSEFs, EuVECAs, UCITS or EU AIFs that the manager manages.

Prohibited activities -

• short selling
• taking exposure to commodities, including via financial derivative instruments, indices or any other means of exposure
• securities lending, borrowing or repurchase transactions and
• using financial derivative instruments, except where the use of such instruments solely serves the purpose of hedging the risks inherent to other investments.

Non-EU assets are allowed.

Non-Retail ELTIFs are exempted.

• 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, EuVECA, EuSEF, UCITS or EU AIF managed by an EU AIFM (concentration limit applies - a single ELTIF may not acquire more than 30% stake in these, unless itself a feeder)
• 10% of its capital in UCITS eligible assets issued by a single body;
• Aggregate risk exposure to STS shall be limited to 20% of its capital
• UCITS concentration limits in relation to significant influence apply (article 56(2) UCITS Directive)

The ELTIF's manager should indicate in the prospectus of the ELTIF if the ELTIF intends to borrow cash as part of its investment strategy and, if so, must also indicate theirein the borrowing limits.

Borrowing limit start date to be determined by the rules or instrument of incorporation (such date to be no later than three years after the commencement of marketing).

Borrowings covered by capital commitments (subscription line facilities) are not subject to the borrowing limit.

Temporary suspension of the borrowing limit applies when the ELTIF is raising additional capital or reducing the existing one.

Loan maturity date – no longer than the life of the ELTIF.

Vehicles that may be used by entities qualifying as an AIF.

The legal structures available in Luxembourg for AIFs include, but are not limited to:

• Companies
• Mutual funds (FCP)
• Partnerships (for example, SCS, SCSp, SCA)

The ELTIF label can be applied at fund and sub-fund level without requiring the entire fund to fall under the scope of the ELTIF regulations.

The authorization granted to compartments to be labelled as ELTIFs must be limited solely to those specific compartments.

ELTIFs benefit from the marketing passport under the AIFMD

Initial and ongoing due diligence to be carried out in accordance with the AML / CFT Law.

Specific rules applying to marketing of ELTIFs to retail investors:

• A MiFID suitability test will have to be carried out for each individual investor
• When all of the following conditions are met, the express consent of the investor has to be obtained: (i) the suitability assessment is not provided in the context of investment advice, (ii) the ELTIF is not considered suitable, (iii) the investor wishes to proceed nevertheless
• Clear written alerts will need to be issued in case the life of the ELTIF exceeds 10 years or where the instruments of incorporation provide for the possibility of matching of units/shares, that this does not guarantee exit or redemption of the units concerned
• Equal treatment within share classes is obligatory
• Feeder ELTIFs – disclosure that it permanently invests >85% of assets in the master ELTIF

Prospectus (and a PRIIPs KID for retail investors) to be issued prior to any marketing.

The following information, while not exhaustive, should be included in the prospectus:

• Information about the long-term nature of the ELTIF's investments (investment objectives and strategy)
• Information on the jurisdictions in which the ELTIF has invested
• Information on the eligible assets in which the ELTIF is authorized to invest
• Disclosures to investors required under Article 23 of the AIFMD
• Information on whether the ELTIF is intended to be marketed to retail investors
• Information on the frequency and the timing of distribution of proceeds
• Information about the end of the life of the ELTIF, the possibility to extend it and the conditions thereof
• Any other information considered by the competent authorities to be relevant to enable investors to make an informed assessment regarding the investment proposed to them and, in particular, the risks attached thereto

The prospectus and any other marketing documents shall clearly inform investors about, inter alia:

• the long-term nature of the ELTIF's investments
• the end of the life of the ELTIF as well as the option to extend the life of the ELTIF, and the conditions thereof
• whether the ELTIF is intended to be marketed to retail investors
• investors' redemption rights
• the frequency and the timing of distributions of proceeds, if any, to investors during the ELTIF life
• advise investors that only a small proportion of their overall investment portfolio should be invested in an ELTIF
• the hedging policy
• the risks related to investing in real assets, including infrastructure
• inform investors regularly, at least once a year, of the jurisdictions in which the ELTIF has invested
• in the case of a feeder ELTIF; inform that it permanently invests 85 % or more of its assets in units or shares of the master ELTIF

Besides annual report requirements under the AIFMD, ELTIF annual reports must contain:

• a cash flow statement
• information on any participation in the EU budgetary funds
• information on the value of individual portfolio undertakings and other assets invested in, and
• information on all jurisdictions where investments are located.

Redemptions possible as from the date of the end of the ELTIF life (must be indicated in the rules or instruments of incorporation; possible to foresee temporary extensions).

Before the end of the ELTIF life (cumulative conditions):

• After the expiration of the minimum holding period (not applicable to feeder ELTIFs)
• Manager demonstrates, at authorisation and throughout the life, appropriate redemption policy and compatible liability management transactions
• Redemptions are limited to risk diversification percentages (pro-rata if redemption requests exceed limits)
• Fair treatment of investors

Repayment in cash must always be possible, and in kind if (cumulatively) this possibility is provided by the instrument of incorporation and all investors are treated fairly, the investor specifically requests it and there are no restrictions to transfer those assets.

Various tax-related aspects must be taken into consideration by ELTIFs, including the tax treatment of the fund, its investors, and the underlying assets.

In some cases, ELTIFs may have to furnish tax reports to investors and adhere to tax withholding requirements.

ELTIF is a marketing label in the EU and does not carry any direct tax implications. This depends on the AIF's regulatory status and legal structure.

ELTIFs have the option to list their units or shares on a regulated market or on a multilateral trading facility

Listing of ELTIF units or shares on a regulated market or on a multilateral trading facility possible.

Transfer of units or shares by investors to third parties (other than the AIFM) in compliance with applicable regulatory requirements admitted.