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Regulatory Change To Spur Demand For ELTIFs

Demand for European long-term investment funds (ELTIFs) is expected to grow, provided the necessary changes are made to the collective investment framework, according to research firm Cerulli Associates.

The ELTIF structure was introduced in 2015 as a way to increase the amount of non-bank finance available for investing in companies and projects in the EU, but has failed to gain much traction in member countries, with the recent exception of Italy.

Cerulli Associates believes that the success of ELTIFs will be determined in large part by the outcome of a European Commission consultation, which was launched last year. Market participants were asked to suggest changes to improve the functioning of the ELTIF framework. The responses to the public consultation are expected to be released later this year and a new framework adopted in 3Q 2021.

“Changes will be necessary to make ELTIFs a product of choice in EU markets,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli.

One such change would be to convert the ELTIF into an open-end structure, alongside the existing closed-end one, by removing current limitations on its life cycle, introducing appropriate redemption terms, and including adequate liquidity management tools. Both the European Fund and Asset Management Association and the European and Securities Markets Authority have called for this change.

Cerulli believes that clarification of some aspects of real assets’ eligibility would also encourage ELTIF product development activity across the major member states. The majority of ELTIFs currently focus on private debt and loans, rather than real assets or private equity. Cerulli also expects to see an increasing number of ELTIFs that focus on multi-credit markets. This is an area where we anticipate more demand for partnerships between local and foreign managers.

Global private banks with distribution networks across multiple countries will likely be the main drivers of demand for ELTIFs. Around one-third of the private banks Cerulli surveyed currently offer ELTIFs to their clients; the rest are either unsure about the structure or plan to evaluate it over the next 12 months.

The tax treatment of ELTIFs is a concern for some private banks. In Italy, a new tax benefit for Italian investors using ELTIFs has fueled the authorization of alternative piani individuali di risparmio (PIR) ELTIF-compliant funds in the country since the beginning of 2021.

Another concern is that it can be risky to offer ELTIFs to less-sophisticated investors who could not understand them very well, so private banks distributing such products need to emphasize education.

“Fund managers that are considering launching ELTIFs over the next 12 to 24 months should prioritize infrastructure, real estate, and private equity funds that focus on the UN’s Sustainable Development Goals, given the lack of such products in the market,” says Zumbo.


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