European Long-Term Investment Funds "ELTIF" (Part 3)

Sailing Boats, Afternoon - Hiroshi Yoshida

La versión en castellano de esta entrada se puede ver en este LINK. 

This entry continues from the second part, which can be seen at this LINK.

With the regulation of ELTIF 2.0, the investment policy of this type of fund has been expanded and made more flexible, as we saw in the previous entry. Specifically, we saw that ELTIF 2.0 can invest in more companies than ELTIF 1.0 and through more instruments. For example, ELTIF 2.0 can invest in companies and assets that ELTIF 1.0 could not, such as FinTech, listed companies with a market capitalization of up to €1,500,000,000 (instead of €500,000,000), UCITS, and AIFs of the EU managed by EU AIFMs, as well as real assets valued over €10,000,000. Additionally, ELTIF 2.0 can invest through instruments not allowed for ELTIF 1.0, such as STS securitizations and EU green bonds.

Now, let's look at the mandatory ratio (core investments) and diversification rules for ELTIF 2.0.

First, it should be noted that the minimum mandatory ratio for ELTIF 2.0 is 55% (core investments), with the remaining 45% being the free investment ratio. However, the constitutive documentation of the fund may set a threshold higher than 55%, but never lower. Let’s recall that the mandatory ratio for ELTIF 1.0 was 70%.

Core investments means that at least 55% of the fund's assets must be invested in eligible assets. The eligible assets are those already mentioned in the second part of this series. These include equity, convertible debt, debt, etc., in qualifying portfolio undertakings, as well as real assets and shares in funds such as ELTIFs, EuVECAs, etc., among others.

In addition to the investment requirement related to the mandatory ratio, those ELTIFs marketed to retail investors must comply with certain diversification rules. It is important to note that ELTIFs marketed only to professional investors are not subject to diversification rules.

The diversification rules are aimed at ensuring that the fund invests its assets in a non-concentrated manner, in order to reduce portfolio risk. Since it is a mechanism to protect investors, it is understood that ELTIFs marketed exclusively to professional clients do not require this rule.

Therefore, only ELTIFs marketed to retail investors must adhere to the following diversification rules:

a) A maximum of 20% of the fund’s assets in instruments issued by a single qualifying portfolio undertaking or in loans granted to a single qualifying portfolio undertaking.

b) A maximum of 20% of the fund’s assets in a single real asset.

c) A maximum of 20% of the fund’s assets in shares or units of a single ELTIF, EuVECA, EuSEF, UCITS, or AIF of the EU managed by an EU AIFM.

d) A maximum of 10% of the fund’s assets in assets referred to in Article 9.1(b) (i.e., financial instruments), when such assets have been issued by a single entity. However, this 10% can be extended to 25% when the obligations have been issued by a credit institution domiciled in a Member State and subject to special public supervision designed to protect bondholders.

e) A maximum of 20% in STS securitizations.

f) A maximum of 10% in over-the-counter (OTC) derivatives or repurchase agreements or reverse repurchase agreements.

For the application of diversification rules, companies within the same group are counted as a single entity for calculating these thresholds.

Regarding feeder ELTIFs, which are ELTIFs (or an investment compartment of an ELTIF) authorized to invest at least 85% of their assets in shares or units of another ELTIF or investment compartment of an ELTIF, they are not subject to the threshold referred to in point (c). That is, the maximum investment limit of 20% of their assets in shares or units of a single ELTIF, EuVECA, EuSEF, UCITS, or EU AIF managed by an EU AIFM does not apply. Thus, a feeder ELTIF can invest all its assets in another eligible fund.

Finally, it is important to note that the ELTIF documentation can include the time period the fund has to comply with its portfolio composition and diversification rules.

The fourth part of this series can be seen here.