In our previous alert ELTIF Reform: A Milestone in the Development of an EU Private Fund Structure for Accessing Wholesale Markets, we discussed the EU Commission’s adoption of a revised regulation for the European Long-Term Investment Fund (ELTIF), which we refer to as “ELTIF 2.0.”

On 19 December 2023, the European Securities and Markets Authority (ESMA) published its Final Report on the draft revised Regulatory Technical Standards (RTS) supplementing ELTIF 2.0. The Final Report follows from ESMA’s May 2023 consultation, noted in our previous alert ELTIF RTS: Important detail in the ESMA consultation.

ESMA has submitted the RTS to the European Commission, with a three- to four-month window for adoption. The RTS will enter into force on the day following its publication in the Official Journal. When it comes into force, the RTS will repeal, replace, and consolidate the current RTS.

The RTS is, therefore, expected to come into force in Q2/Q3 2024. As ELTIF 2.0 came into force on 10 January 2024, we would expect that managers of any new ELTIFs will seek to comply with the new RTS.

Some Highlights

There are some areas where, having taken into account stakeholder feedback, ESMA has either revised the technical standards from those initially proposed or provided clarity and more specific criteria. We discuss these below, but three headline points are noteworthy:

• Lockup periods: There will be no fixed minimum holding period during which an ELTIF manager cannot grant redemptions. This is because the appropriate period may depend on each ELTIF’s individual characteristics, and a fixed minimum holding period could prevent the marketing of ELTIFs through certain distribution channels. This approach is better than that originally conceived because it accommodates ELTIFs with different investment strategies and liquidity profiles.
• Redemption notice periods: Despite stakeholder feedback, ESMA has chosen an approach to redemption that provides for different minimum notice periods based on the percentages of liquid assets held and of liquid assets that can be redeemed. ESMA’s view is that this will accommodate different types of ELTIF whilst ensuring investor protection. For an ELTIF that invests, for example, 100% in real assets, with no exposure to UCITS or other liquid assets, the notice period for redemptions (which, subject to derogation, must be no more frequent than quarterly) will have to be at least 12 months. This is more prescriptive than, for instance, the rules applicable to the UK Long Term Asset Fund, which require a 90-day minimum notice period for redemptions (which must be no more frequent than monthly).
• Liquidity management/anti-dilution tools: ELTIF managers can deviate from the requirement to implement at least one specified anti-dilution tool, provided they can justify this to their national competent authority (NCA). ESMA has also removed the references to the requirements on liquidity management tools (LMTs) under AIFMD II (Annex V). Since this proposal has yet to be formally adopted, the revised Directive will need to be transposed and is currently not applicable. However, an ELTIF manager, as an EU AIFM, will be subject to the AIFMD liquidity risk management requirements as revised under AIFMD II (including investor disclosures, liquidity stress tests, and regulatory reporting) in due course, alongside the ELTIF rules. (See our recent AIFMD II client alert.)

A Manager Must Determine The Minimum No-Redemptions Period

Instead of a fixed minimum period, an ELTIF manager must demonstrate to its NCA the appropriateness of its lockup period and its compatibility with valuation procedures and the ELTIF redemption policy, based on the following non-exhaustive criteria (the criteria themselves are similar to those consulted on):

• The long-term nature and investment strategy of the ELTIF 
• The underlying asset classes/their life-cycle position and liquidity profile
• The ELTIF’s investment policy and the extent to which the ELTIF takes part in the investment policy and governance of its underlying assets
• The investor base (including the expected aggregate concentration of retail investors and, if the ELTIF is solely marketed to professional investors, the degree of concentration of their ownership)
• The ELTIF’s liquidity profile
• The asset valuations and time needed to produce reliable, sound. and up-to-date valuations
• The extent to which the ELTIF lends or borrows cash, grants loans, and enters into securities lending or borrowing or repurchase transactions (or other agreements that pose similar economic risks)
• Portfolio composition and diversification
• Average and mean length of life of the ELTIF assets
• Whether the minimum holding period covers the time to complete the investment of the ELTIF’s capital contributions/at least the initial investment phase of the ELTIF (i.e., the longer that time, the longer the minimum holding period should generally be)

Flexibility in The Quarterly Maximum Frequency For Redemption

The Final Report does not introduce any change to redemption frequency (no more than quarterly) but includes new detail to the proviso that there can be derogation from this, when an ELTIF manager can justify a higher frequency to its NCA, based on the ELTIF’s individual features and having a reliable, sound, and updated asset valuation.

Calibration Table for Differing Investors’ Notice Periods to Redeem and Redemption Size Limits

The detail on this has been fleshed out and clarified. A default mandatory minimum redemption notice period of 12 months is to apply for each investor’s redemption requests. However, shorter notice periods are allowed, to be calibrated based on the ELTIF’s minimum holding in UCITS/liquid assets and maximum amount of liquid assets that can be used to satisfy redemptions. The calibration table (Article 5(6) of the draft Delegated Regulation) is copied below and shows, for example, that the redemption notice period can be less than one month if the ELTIF holds at least 40% in UCITS/liquid assets and the redemption limit is 20% of the ELTIF’s UCITS/liquid asset holdings (and nine to 12 months where the ELTIF holds at least 13% in liquid assets and has a 50% redemption limit).

An ELTIF manager must justify to its NCA any notice period less than three months, including how it is consistent with the specified requirements and in the interest of the ELTIF investors (unless marketing to professional investors only and the NCA exempts the ELTIF manager from this requirement).

Although the ability to elect shorter notice periods is welcome, this is limited to certain scenarios and so curtails the ELTIF manager’s ability to fully determine the redemption policy of its fund, in particular for less liquid/illiquid assets.

Manager to Determine The ELTIF’s LMTs

An ELTIF manager must implement at least one anti-dilution mechanism (in addition to notice periods) among anti-dilution levies, swing pricing, and redemption fees, but (unlike the restriction in the consultative version of the draft RTS) can select LMTs other than those three listed, provided it justifies those to its NCA (and having taken due account of the investors’ interests). Managers of ELTIFs marketed only to professional investors can ask their NCAs for dispensation from this requirement.

In order to reduce the probability of suspension, redemption gates can be implemented in a similar way to shorter notice periods. This is more flexible than what was provided for in the draft RTS consulted on (which restricted the use of redemption gates to exceptional circumstances).

This is a welcome change consistent with recent revisions to the AIFMD, which recognises that the primary responsibility for liquidity risk management remains with the AIFM.

ELTIF Manager’s Matching Mechanism and pricing

The main changes here are details around pro rata conditions on transfer requests. An ELTIF manager wanting to offer the matching mechanism will need to set out in its constitutional documents the procedures, format, process, and timing of the matching mechanism, the frequency/periodicity and duration of the matching window, the dealing dates, deadlines for submission of purchase and exit requests, settlement and payout periods, how undue risks for the ELTIF are to be avoided, and how the mechanism differs from its redemption policy.

Information to Be Provided to NCAs

ESMA has provided that the ELTIF manager has to notify its NCA “as soon as reasonably practically possible and not later than within 3 business days” from the date when it knows/should have known that there is a material change to the information provided (on authorisation and on an ongoing basis) in relation to, or that may affect, its redemption policy and LMTs; and must provide the updated versions of the information within 20 business days. The feedback states, “ESMA considers this is a key aspect of the supervision of ELTIFs, which may be marketed to retail investors.” In the consultative draft, there was a 10-day notification period on knowledge of a material change.

Disposal of Assets

There is no longer a requirement for an ELTIF manager to submit to its NCA an itemised schedule for the orderly disposal of assets, and so this mandatory disclosure requirement has been removed from the RTS.

Conclusion

We would expect the number of ELTIF authorisations (just over 100 to date) to start to climb now that the revised ELTIF framework is operational. The aim of the amendments is to make ELTIFs more appealing to investors, in particular retail investors; minimise restrictions and reduce barriers; and provide more flexibility and accessibility to the regime and more favourable redemption options than those provided for in the original framework.

Although other (non-ELTIF) AIF structures are likely to continue to dominate the institutional end of the non-listed funds market, the ELTIF may be an appealing option for those managers targeting local government pension schemes, HNWIs, affluent retail markets, charities, and institutions as well as conventional professional investors. A highlight is the fact that the ELTIF marketing passport covers retail investors as well as professional investors.

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