ELTIFs were initially met with a slow uptake, followed by criticism that the investment governance was too prohibitive to achieve their aim of giving retail investors access to a wider range of more illiquid asset classes. Under ELTIF 2.0, a series of new proposals were created, aimed at broadening the appeal. By increasing the range of potential holdings and reducing barriers to retail investors, we could see €100 billion of inflows in the next five years, according to the Alternative Investment Management Association (AIMA).¹

The amended proposals were announced in late 2021, following a process of consultation and consideration by European lawmakers, and received political agreement from the European Parliament in October 2022.² ELTIF 2.0 was formally adopted on February 15, 2023 with a nine month early adoption, opt-in grace period for existing ELTIFs, with a deadline period of five years until January 11, 2029 to formally adopt the 2.0 regime.³ New ELTIFs under the 2.0 regime can launch as of January 10, 2024.

In the agreement announcement, the EC cited retail inflows as a key part of the proposals:

In addition to meeting political demand within the European Union (EU) to direct more investment into infrastructure projects and growth industries, the ELTIF is also in sync with investor sentiment within the region.

In a survey of institutional investors conducted on behalf of State Street in the fourth quarter of 2022, 50 percent of European respondents said they saw “strong demand” for access to private markets from individual investors.⁴

The movement to provide access to private markets long-term investments to non-institutional investors is not new or specific to Europe. In North America, business development companies (BDCs), interval funds and real estate investment trust (REIT) structures, have looked to bridge the gap for some time. For example, BDCs have operated in the United States market since the early 1980s; however after several structural and regulatory updates, they have proven themselves as a very effective format, with many new entrants and significant capital raised from institutional as well as non-individual investors.

BDCs have shown that there can be an effective vehicle to bridge the gap in the market, as indicated by their substantial growth from 2014 to 2022, from US$50 billion to US$265 billion⁵, with the majority of the investment strategies most suited to private credit and debt portfolios.
 

ELTIFs history and overview
ELTIF was introduced in 2015 by the EU to help fund the union’s digital, social and sustainable transition. It was intended as a way to democratize the private markets industry and aimed at facilitating the raising and channeling of capital towards long term investments in the real economy. Since its launch, there have only been 84 funds registered and marketed, raising less than US$10 billion⁶ amongst them, which is significantly lower than forecasted. The original intention of the legislation was too rigid to allow full adoption, and a clear need for update (2.0) was presented.

After years of discussion and planning, the latest ETLIF regulation (2.0) was formally adopted by the European Parliament on February 15, 2023. With the latest changes, the European Parliament is forecasting the size to be €100 billion by 2028. This growth can be attributed to the growing attractiveness of private markets and the desire of further diversification in the portfolio of professional and retail investors. ELTIFs are viewed to be the investment vehicle of choice in the private markets space.
 

Problems with ELTIFs in their original form

• Lack of pragmatism or feasibility when it came to eligible assets
• Diversification and concentration requirements that were considered too stringent
• Barriers for marketing their products to retail investors
  • E.g., ELTIFs were required to have facilities in place in member states where retail investors targeted were located for the purpose of subscriptions, payments and information

The new regulation has not tackled every issue, but 2.0 is still an important step to making ELTIFs an attractive investment vehicle, and we expect further improvements to be made in the future.
 

Updated ELTIF rules