European Long-Term Investment Funds (ELTIFs) (Part 4)

Sailing Boats, Evening - Hiroshi Yoshida


This entry follows the third part, which can be viewed at this LINK.

Having covered the introduction to these vehicles, their investment policy, and diversification requirements, among other aspects, we will now focus on another important topic related to these funds: their leverage policy.

Regarding the possibility of ELTIFs to take on debt, this was already addressed in Regulation (EU) 2015/760 (ELTIF 1.0), but with a lower threshold than under the current Regulation (EU) 2023/606.

Specifically, Article 16 of ELTIF 1.0 stated that these funds could receive cash loans with a maximum limit of 30% of the fund’s capital value. Additionally, the loan had to be used to invest in eligible assets (with certain exceptions), be in the same currency as the assets being financed, have a maturity that does not exceed the fund’s duration, and, if secured, the encumbered assets must not represent more than 30% of the ELTIF's capital value.

The ELTIF’s prospectus must contain an explanation of the fund’s borrowing policies, following the usual practice applied to other types of funds, as we have discussed in previous blog posts, such as this one.

However, with the new regulation for ELTIF 2.0, the leverage possibilities for these funds are increased, even when marketed to retail investors.

In particular, ELTIF 2.0 allows loans to represent up to 50% of the fund’s net asset value (NAV) when marketed to retail investors, and this limit increases to 100% of the ELTIF's NAV when it is marketed exclusively to professional investors.

As can be seen, not only has the borrowing threshold increased, but so has the calculation base. In ELTIF 1.0, the fund’s capital value was considered in order to calculate the limit, while in ELTIF 2.0, the NAV of the fund is taken into account. Therefore, if the invested assets appreciate, greater leverage can be achieved.

Regulation (EU) 2023/606 retains most of the previous rules in a similar manner, with some additional clarifications. For instance, it explicitly states that loans covered by undrawn investment commitments from the fund’s investors will not be counted toward the leverage limit. Additionally, it allows for the specification of a date by which the ELTIF must comply with the leverage limits, but this date cannot exceed three years from the start of its marketing.

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