The high investment threshold of European long-term investment funds is being blamed for limiting take-up by investors, according to research by Cerulli Associates.
The Boston-based global analytics firm says the take-off of this recently launched investment vehicle has been hampered, despite efforts by European regulators to encourage investment from mid-sized pension funds and insurers, by easing the Solvency II capital requirements for insurers with European long-term investment funds (ELTIFs) exposure.
ELTIF regulation was fully implemented across the European Union in December 2015, introducing a new type of collective investment vehicle allowing retail and professional investors to invest in companies and projects that need long-term capital.
Barbara Wall, Europe managing director at Cerulli Associates said that the funds may be turning out to be “a harder sell than envisaged”, due to the various tax treatments in different countries across the EU, among other issues.
RAIFs and ICAVs boost
As a result investors may be more likley to turn to Luxembourg’s reserved alternative investment fund (RAIF) and Ireland’s collective asset management vehicle (ICAV), instead, “particularly if the latter is able to attract funds converting from other Irish investment funds structures,” she said.
The RAIF is the latest step in Luxembourg’s drive to become a hub for alternative investment funds. It has very similar features to Specialized Investment Funds and SICARs, but does not need to be approved and is not supervised by the Commission de Surveillance du Secteur Financier (CSSF). The ICAV has become the vehicle of choice for both UCITS and AIFs domiciled in Ireland.
Still ‘signs’ of ELTIF interest
Noting that it is still early days for ELTIFs, Wall says there are however, still signs of interest from managers already investing in the infrastructure space and those looking to target the mass affluent market.
“Demand will depend on liquidity, how investments are viewed for capital risk and the treatment of the fund over the long term,” added Wall.
To qualify as an ELTIF, a fund must (among other things):
- be managed by an authorised AIFM
- invest at least 70% of its of its capital in eligible investment assets
- not engage in short selling, and
- observe strict limitations on its use of leverage and derivatives.
In general, ELTIFs do not offer redemption rights before the end of the fund’s life, which must be clearly indicated as a specific date in the ELTIF’s rules or instruments of incorporation and disclosed to investors.
The regulation sets out additional disclosure and other provisions, designed to protect investors – in particular where the ELTIF is to be marketed to retail investors.
For example, an ELTIF manager will have to undertake a suitability test to confirm that investment is suitable for the retail investor and to provide that investor with “appropriate investment advice”.
In addition, the manager must ensure that a retail investor with a portfolio of up to EUR 500,000 does not invest more than 10% of his/her portfolio in ELTIFs, provided that the initial amount invested in one or more ELTIFs is not less than EUR 10,000.