ELTIF regime revamp provides investors with greater opportunities

The amending regulation to the European Long-Term Investment Funds Regulation (Revised ELTIF Regulation) encourages investment in both listed and unlisted private companies, infrastructure projects and real estate that may require long-term capital investment. In particular, the recast ELTIF significantly broadens the investment opportunities for retail by lowering the investment threshold for retail investors. The revised regulation also provides greater accessibility for a wider range of retail investors.

In Ireland, the Central Bank has introduced a new chapter in its alternative investment funds (AIF) rulebook addressing the amendments, setting out the domestic supervisory and reporting requirements applicable to Irish-domiciled ELTIFs.

Features of the ELTIF regime

ELTIFs may be established as an ‘umbrella fund’ structure. These structures are a mix of both ELTIF and non-ELTIF funds, providing flexibility to managers with the option of adding an ELTIF fund to an established umbrella. This allows for additional funds to benefit from the preexisting infrastructure.

In terms of retail, a retail investor is required to be established within a retail investor umbrella fund. Additionally, a professional or qualifying investor ELTIF is restricted to being established within a qualifying investor umbrella fund.

In Ireland, professional and qualifying investor ELTIFs are subject to a 24-hour authorisation process under the Central Bank’s qualifying investor regime, whereas retail investor ELTIFs are subject to more detail prior review. 

An ELTIF may be established in Ireland as an Irish collective asset management vehicle, an investment limited partnership, a unit trust common contractual fund or a variable capital investment company.

Product rules for retail investors

The amended regulation allows for a much broader scope of eligible retail investments as well as less prescriptive diversification requirements. However, a number of rules continue to apply.

For instance, ELTIFs are required to invest a minim of 55% of their capital in eligible investments, such as qualifying portfolio undertakings or real assets. Additionally, investment risk must be spread and therefore retail ELTIF investment restrictions and diversification requirements apply.

 These include:

• up to 20% of capital in the equity or debt of a single qualifying portfolio undertaking;
• up to 20% of capital in a single property investment;
• up to 20% in a single ELTIF, EuVECA, EuSEF, UCTIS or EU AIF managed by an EU AIFM;
• up to 20% of capital in simple, transparent and standardised securitisations;
• up to 10% in transferable securities and money market instruments; and
• up to 10% may be exposed to a counterparty under OTC derivative transactions, repo or reverse agreements.

Additionally, an ELTIF may acquire no more than 30% of the shares or units of an underlying eligible ELTIF, EuVECA, EuSEF, UCTIS or EU AIF managed by an EU AIF manager (AIFM).

A number of equity, debt and loan requirements apply, with ELTIFs also required to consist of eligible investments. This includes debt instruments issued by a qualifying portfolio undertaking, loans granted by the ELTIF to a qualifying portfolio undertaking, and European green bonds issued by a qualifying portfolio undertaking.

Borrowing limits are also applied but have been increased from 30% to 50% of the ELTIF’s net asset value for retail ELTIFs. This limit increases to 100% of the value of the ELTIF when the fund is marketed to professional investors. However, borrowing that is fully covered by investors’ capital commitment is disregarded for the purpose of the 50% limit. In addition, an ELTIF can borrow in a currency that is not its base currency, but only where appropriate currency hedging agreements are in place.

Other investment restrictions include short selling and taking direct or indirect exposure to commodities. ELTIFs cannot use securities lending, securities borrowing or repurchase transactions if more than 10% of the assets of the fund are affected. Further, financial derivate investments are not allowed, aside from for hedging purposes.

Liquidity management

ELTIFs are typically structured as ‘closed-ended’ funds, which means they have a defined lifespan. This duration should be sufficient to meet the fund’s investment objectives and align with the life cycle of its underlying assets.

If an ELTIF is open-ended – or a closed-ended ELTIC allows redemption during its term – it must implement suitable redemption policies and liquidity management tools that align with its long-term investment strategy.

To support this, the European Securities and Markets Authority (ESMA) has proposed technical standards on liquidity management. These aim to ensure that an ELTIF’s redemption framework is consistent with the life cycle of its investments. Under these rules, AIFMs will be required to establish robust liquidity management processes.

Authorisation process

In Ireland, qualifying and professional investor ELTIFs benefit from a streamlined 24-hour authorisation process by the Central Bank. If an application is submitted by 12 noon on a business day, authorisation will be granted by the following business day.

In contrast, the authorisation process for retail ELTIFs involves a more detailed review during which the Central Bank examines important fund documents, primarily the prospectus. Within 20 working days of receiving the initial application, the Central Bank will issue its first set of comments. Once the applicant responds, the Central Bank has a further 10 working days to review the responses and provide any additional feedback. This process continues until the Central Bank confirms it has no further comments. At that point, the AIFM may proceed to formally apply for authorisation of the retail ELTIF.

Taxation of ELTIFs

ELTIFs in Ireland benefit from Ireland’s favourable tax regime. They are exempt from Irish tax on income gains, and net asset value. No Irish stamp duty applies to the issue, transfer or redemption of units, and no withholding tax is charged on payments to investors.

No Irish withholding tax applies to distributions or redemptions made to non-Irish residents, provided a valid tax residence declaration is submitted. Additionally, ELTIFs generally quality for Ireland’s double tax treaty benefits, potentially reducing foreign withholding taxes on dividends, interest, and capital gains.

Distribution to professional and retail investors in the EU

ELTIFs benefit from the AIFM marketing ‘passport’, allowing Irish ELTIFs to be marketed across the EEA without additional authorisation. To market an ELTIF, the AIFM must submit a marketing notification and supporting documents to the Central Bank or Commission de Surveillance du Secteur Financier (CSSF). Once complete, the home regulator forwards the notification to the host state regulator within 10 working days, after which marketing can begin.

The updated ELTIF framework introduced several changes to facilitate retail access. For instance, ELTIFs no longer need to appoint local facilities agents in each EU country, reducing distribution costs. Additionally, the €10,000 minimum investment and 10% portfolio cap for retail investors have been eliminated.

The suitability assessment has also been simplified. Now, AIFMs must apply product governance and assess suitability under the EU’s MiFID II regime. However, this can be waived if the investor explicitly acknowledges the risk and confirms understanding. AIFMs are no longer required to provide investment advice to retail investors, easing the compliance burden.

The impact of the updated ELTIC rules is profound, forming a pathway to a new era of private market investments for retail investors in Ireland and across Europe.

Co-written by Lilly Buru of Pinsent Masons. A version of this article was previously published by IFC Review.