European Long-Term Investment Funds (ELTIF) 2.0 (Part 2)

Rapids at the Upper Reaches of Tone River - Hiroshi Yoshida

La versión en castellano de esta entrada se encuentra disponible en este LINK.

This post continues with the first part, that can be seen in this LINK.

With the regulation of ELTIF 2.0, the investment policy of this type of fund has been expanded and made more flexible. Let's take a look at the types of companies they can invest under the new regulation and through which instruments/assets such investments can be made.

Firstly, regarding the type of companies they can invest in, i.e., qualifying portfolio undertaking, the following types are included:

1) They must not be financial companies, except if (a) they are financial companies that are not financial holding company or mixed-activity holding company, and (b) those financial companies have been authorized or registered less than 5 years before the date of the initial investment (this new inclusion for ELTIF 2.0 allows investment in FinTech). If the financial company exclusively finances qualifying portfolio undertakings or real assets accepted by the ELTIF Regulation, they are considered qualifying portfolio undertaking.

2) They must not be listed on a regulated market or multilateral trading system, or if listed, their market value at the time of investment must not exceed €1,500,000,000.

3) They must be established in an EU Member State or in a third country, provided that this country is not included in the high-risk list of Directive (EU) 2015/849 nor in the list of non-cooperative countries and territories for tax purposes.

It is worth noting that the possibility for ELTIF 2.0 to invest in listed companies whose market value does not exceed €1,500,000,000 is a significant increase compared to the €500,000,000 limit for ELTIF 1.0. Furthermore, this limit applies at the time of the investment.

Regarding the instruments through which ELTIF can invest, the following must be considered:

1) Eligible investment assets (eligible assets), as outlined below; and

2) Assets referred to in Article 50(1) of Directive 2009/65/EC, which include transferable securities and money market instruments admitted or traded on a regulated market, shares of UCITS, deposits in credit institutions with maturities not exceeding 12 months, and financial derivative instruments, among others.

As for eligible assets, these are as follows:

a) Equity or quasi-equity instruments of a qualifying portfolio undertaking.

b) Debt instruments issued by a qualifying portfolio undertaking.

c) Loans granted by the ELTIF to a qualifying portfolio undertaking. It should be noted that loans granted by the ELTIF must have a maturity date that does not exceed the duration of the ELTIF.

d) Units or shares of one or more ELTIFs, European Venture Capital Funds (EuVECA), European Social Entrepreneurship Funds (EuSEF), UCITS, and EU Alternative Investment Funds (AIFs) managed by an EU AIFM, provided that they invest in eligible assets and do not invest more than 10% of their assets in another collective investment undertaking. This 10% limit does not apply to feeder ELTIFs.

e) Real assets (these are assets that have intrinsic value due to their structure and properties).

f) Simple, transparent, and standardized securitizations under certain conditions.

g) Bonds issued by an eligible portfolio company.

Regarding investment in real assets, it is worth noting that with ELTIF 1.0, they could not invest in real assets whose value exceeded €10,000,000. However, with ELTIF 2.0, there is no longer any maximum threshold, nor are there rules on the valuation of the nature and objectives of these assets (such as environmental or social criteria). This allows ELTIF to invest in all types of real estate investment strategies, such as housing, offices, warehouses, infrastructure, etc.

However, ELTIFs cannot engage in short-term investments (short-selling of assets), invest in commodities, engage in securities lending transactions (in excess of 10% of the ELTIF's assets), or use financial derivative instruments (except for hedging purposes). They also cannot invest in assets where no impact on the real economy is observed, such as art, manuscripts, wine reserves, jewelry, or other similar assets, i.e., where no future real impact on the economy is seen.

It is worth mentioning that at least 55% of the ELTIF's assets must be invested in eligible assets, while the remaining 45% is permissible for free investments. This is without prejudice to various diversification and concentration rules that we will discuss later, which depend on whether the ELTIF is marketed to retail investors or not.