European Council and Parliament approve new long-term investment funds

New rules authorising the creation of European long-term investment funds (ELTIFs) (80-page / 551KB PDF) will now come into force shortly after they are published in the Official Journal of the European Union (OJEU). The ELTIF regulation will place limits on the use of the new funding vehicle to ensure they are used for the stated purpose.

"The creation of clearly defined ELTIFs will help tackle barriers to long-term investment in, for example, infrastructure projects, thereby stimulating employment and economic growth," the Council said in a statement.

"ELTIFs will only focus on alternative investments that fall within a defined category of long-term asset classes whose successful development requires a long-term commitment from investors," it said.

The use of ELTIFs will be restricted to investments in unlisted companies, private equity, 'real' assets that require significant up-front capital expenditure and intangible assets, such as research and development projects. An ELTIF will have up to five years to invest at least 70% of its capital in these assets, but can invest any remaining capital up to a maximum of 30% in the full range of assets permitted by the EU's Undertakings for Collective Investment in Transferrable Securities (UCITS) directive.

ELTIFs will be marketed to both professional and retail EU investors. However, the minimum investment of €10,000 will be likely to restrict their use to institutional investors, such as insurers and pension funds. In addition, the ELTIF regulation contains specific consumer protection measures targeted at retail investors.

Retail investors with portfolios of up to €500,000 will not be permitted to invest more than 10% of that portfolio in ELTIFs. The funds will be required to clearly indicate their redemption date in the fund rules and disclose this to investors, so that the investors know they will not be able to cash in their share of the fund before the end of its life. If the lifecycle of the ELTIF is longer than 10 years, the fund manager will be required to issue a written alert stating that it may not be suitable for retail investors.

ELTIFs will also be subject to the same regulatory regime as alternative investment funds, set out in the EU's Alternative Investment Fund Managers Directive (AIFMD). They must also be both incorporated in the EEA, and managed by an EEA-authorised AIFM.

In a separate development which would ultimately benefit long-term investment in EU projects, the European parliament's budget and economic committees have approved plans to establish a European Fund for Strategic Investments (EFSI), to be run by the European Investment Bank (EIB). If approved by member states and the full European parliament, the EFSI would provide public support for projects that are economically viable but are struggling to obtain private investment through the usual channels.

The EFSI is expected to include a €16bn EU guarantee and €5bn EIB guarantee. This would allow the EFSI to assume part of the risk of project failure, so encouraging private investors to get involved. The programme would complement, rather than replace, existing EU and EIB investment programmes.