Increasing access to private markets for non-institutional investors is one of the hottest topics in private equity fundraising right now.
Several industry titans, including Apollo and KKR, have recently talked about how private wealth is expected to become a major source of capital going forward. But creating the right distribution channels to reach this broad group of investors remains a challenge.
In Europe, at least, hopes are high that the revamped European long-term investment fund, or ELTIF 2.0 for short, will open the door to private markets for a wider group of investors.
Initially launched in 2015, ELTIFs are funds based on a collective investment framework created by European policymakers and regulators, with the aim of channeling more investment into European companies and projects that need long-term capital, such as unlisted companies or infrastructure projects.
The structure created vehicles that investment managers could offer to institutional and individual investors seeking exposure to the private markets.
However, the funds never really took off. “I believe less than 100 were launched,” says Pavel Ermoline, investment director at Moonfare, a digital platform for investing in private markets.
He suggests the original structure was too restrictive. “It was not flexible enough in terms of eligible assets (and) concentration limits, and it was not possible to create ELTIFs using fund-of-funds structures.”
He added, “ELTIF 1.0 only really allowed direct investment into individual funds or co-investments. This meant it was not possible to efficiently provide investors with exposure to different geographies or a meaningful number of portfolio companies.”
ELTIF 2.0
Regulators went back to the drawing board. In January, a revised regulation, ELTIF 2.0, came into effect.
The new structure is much more flexible, market participants suggest, and crucially, it allows managers to offer ELTIFs using fund-of-fund structures and eases rules around eligible assets
“It has significantly enlarged the assets eligible for inclusion and will facilitate far greater distribution,” said Silke Bernard, investment funds partner and global head of investment funds practice at legal firm Linklaters. “These were the two big issues: what can you buy within an ELTIF and ensuring access for investors. These elements have been massively improved.”
Bernard says that while the updated structure has its constraints, “with a few exceptions it will be possible for managers to implement almost all the strategies they would want to within the ELTIF 2.0 framework.”
Already a number of new ELTIF products have been launched under the revised framework, including ones by Moonfare and Swedish bank SEB. Bernard expects many more to come to market in the coming months.
In January alone, she suggests, Luxembourg’s financial regulator approved around 10 new ELTIF products. (Many funds in Europe are domiciled there.) She added, “my team in Luxembourg, which is around 40 lawyers, are all working on ELTIFs, including on getting products ready for regulatory approval.”
Final regulatory hurdle
There remain regulatory hurdles to a broad rollout of the product.
Although the amended ELTIF regulation came into effect in January, it did so without so-called regulatory technical standards being in place. Regulatory technical standards (RTS) are instruments used in the European Union to provide detailed technical specifications and guidance about how regulations are to be implemented.
The European Securities and Markets Authority is required to create RTS related to several aspects of the ELTIF 2.0 regulation, including liquidity management tools and notice periods. It published its proposed standards in December last year.
But in March, the European Commission, the EU’s main executive body, published suggested amendments to ESMA’s draft RTS. It suggested that ESMA should allow greater flexibility in relation to redemptions and liquidity management tools. The EU Commission’s suggested amendments have broadly been positively received by the fund management industry. For instance, there had been concerns that ESMA’s draft proposals would make it very difficult for funds to create ELTIFs with evergreen structures.
At the time of writing, ESMA has not responded to the European Commission amendments.
Bernard suggests the commission’s amendments are sensible. “The proposal that was published in March tries to strike the balance between the needs of sponsors and investors. There is always room for improvement, but it does a good job of achieving this,” she said.
She believes that once the final RTS come into force there will be a significant increase in ELTIF products coming to market. Many fund managers have products in development but are waiting on those final rules
Opening up the market
So, will the revamped ELTIF be a game changer for increasing non-institutional investor access to private markets in Europe? Bernard is optimistic.
“I do think it is going to be a very significant development for increasing retail investment into private markets assets,” she said, “if you had asked me a year ago I probably would not have expected such a strong uptick, but now I have seen the number of ELTIFs being readied, it does seem like it could be a very significant moment.”
“It will be a long-term process. While the ELTIF 2.0 is a positive step, it is one part of that process,” said Moonfare’s Ermoline. “The democratization trend is one that will trickle out to cover more investors. Access to private equity started with institutional investors, then professional investors and high-net-worth individuals. The next stage will be mass affluent, and then progressively I would expect retail investors who can demonstrate an understanding of the asset class to gain access.”
Both Ermoline and Bernard stress that the crucial next step is increasing investor awareness and knowledge of the revamped ELTIF structure.
“Most individual investors have never invested in private equity, and increasing their awareness and penetration levels into the asset class will take time. And distributors, like banks, are not always used to talking to this audience about private equity; that is something that needs to develop. But all the pillars are there—the regulatory framework— and there is good industry buy-in,” said Ermoline.
Featured image by Aire images/Getty Images
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