ELTIF 2.0: These changes are important for investors

Since 2015, ELTIFs, the “European Long-Term Investment Funds,” have been intended to boost investment in the European real economy. But: Due to high regulatory requirements and five-digit minimum investments, they were probably not particularly attractive to you as a private individual. The number of ELTIF funds available was limited, further limiting their visibility and accessibility.

Table of contents

• What are ELTIFs?
• ELTIF 2.0: That's changing
• The advantages and disadvantages of ELTIFs: A balanced look
• ELTIFs: A look at returns and risks
• 7 tips for your ELTIF investment
• conclusion
• FAQ

What are ELTIFs?

In short: ELTIFs stand for “European long-term investment funds.” As an investor, they offer you a structure to invest in alternative, off-exchange investments within the EU. Think of asset classes such as private equity, private debt, or infrastructure projects. In the past, this was primarily reserved for large investors, but ELTIFs should change this by bringing supply and demand — i.e. capital requirements for large projects and your investment capital — together.

The challenges so far

Although available since 2015, ELTIFs remained more of an insider tip due to high regulatory hurdles and minimum investments. The available funds on the market were unable to keep up with the high demand. Loud Scope By 2022, only 77 ELTIF structures with a volume of 11.3 billion euros had been launched — a drop in the ocean compared to the overall market for alternative investment funds.

ELTIF 2.0: A turning point

Now comes the good news: With the “ELTIF 2.0” reform, which came into force at the beginning of 2024, the game is changing. The reform significantly lowers access barriers and also opens up the world of ELTIFs for you as a retail investor. In addition, asset managers are given more freedom in fund design, which promises a wider range of investment opportunities.

ELTIF 2.0: That's changing

The introduction of ELTIFs was a promising step, but in practice they fell short of expectations. Why Due to specific investment and distribution restrictions. But the EU has reacted and changed the rules of the game with the “ELTIF 2.0” reform, which was adopted in May 2023 and will apply from January 10, 2024.

1. Minimum investment? No longer available!

First, the biggest change: The previous minimum investment amount of 10,000 euros? Cancelled! It is also no longer necessary to prove a total portfolio of 100,000 euros. As a retail investor, this opens the door to these exciting investment funds. In addition, there are no longer any requirements regarding the maximum allocation of 10 percent of your total assets in ELTIFs if your portfolio comprises less than 500,000 euros.

2. Less bureaucracy, more transparency

The previously complex, ELTIF-specific suitability test has been simplified and adapted to MiFID tests for other financial products. This not only makes it easier for you as an investor to close, but also simplifies the processes for providers. Another advantage: The standardization and streamlining of these processes leads to greater transparency and makes it easier for you to compare with other financial products.

3. More flexibility and liquidity

ELTIFs are essentially long-term investments. Your target investments, such as wind farms, real estate or companies, are designed for a long-term time horizon. What is new, however, is that the early redemption of fund shares is now possible. Some asset managers are planning to create semi-liquid structures that will allow shares to be returned on a quarterly basis. This means more flexibility for you, especially when it comes to investments such as in private equity, where up to now there has often been a capital commitment of seven to ten years.

4. New investment opportunities and expanded diversification

The definition of permitted illiquid investments has been relaxed. Now you can invest in an even wider range of assets, including forest investments, ESG bonds, and securitized investments. Funds of funds and feeder funds are now also possible, which offers you as an investor more variety.

5. More freedom for asset managers: The door to new opportunities

ELTIF 2.0 gives asset managers significantly greater leeway in designing their funds. That may sound technical for now, but it has a direct impact on your investment opportunities. Let's see what that means for you:

Flexibility in investment volumes:

Until now, there were relatively rigid limits on how much could be invested in a single asset. Investments of less than 1 million euros are now possible. This opens the door for smaller, perhaps more innovative projects that you can invest in.

Higher weighting of individual assets:

The maximum weighting of individual assets in the fund was doubled — from 10 to 20 percent of the fund volume. This means that fund managers can now invest more boldly in individual, promising investments, which could offer you as an investor the opportunity for higher returns.

Reducing the minimum investment in target investments:

The reduction in fund volume from 70 to 55 percent allows funds to distribute their capital across a wider range of investments. This could diversify your portfolio and diversify risks.

Higher liquidity and debt capital ratios:

This change allows for higher investment leverage, which can potentially result in higher returns. Of course, this also involves higher risk, but it also opens up opportunities for more aggressive investment strategies.

Global investments:

Most recently, and this is particularly exciting, global investments are now allowed. Funds no longer need to focus exclusively on European assets. This means that as an investor, you can now be part of a global investment strategy, which expands your investment options and gives you access to markets worldwide.

Overall, ELTIF 2.0 significantly broadens your horizons as an investor and offers you and asset managers more flexibility and opportunities for your investment strategy.

The advantages and disadvantages of ELTIFs: A balanced look

ELTIF benefits

Tangible assets: ELTIFs are known for generating stable and attractive returns. They are ideal for diversifying your portfolio and diversifying risk — which is exactly why banks and institutional investors rely on them.

Above-average returns: ELTIFs have the potential to offer higher returns than traditional asset classes. They invest in long-term projects with great growth potential. In the private equity sector, for example, experts such as various banks expect annual returns of around 10.8 percent over the next 15 years, while the average capital market return is seven to eight percent.

More stability: By decoupling from the public market, ELTIFs offer more stable development. They are often less susceptible to capital market fluctuations and crises.

Good diversification and risk diversification: As alternative investments, ELTIFs offer you access to asset classes that were previously beyond your reach. They correlate only slightly with the capital market, which can further strengthen your portfolio.

ELTIF disadvantages

Long-term commitment: ELTIFs are designed to last several years and are generally illiquid. You should therefore only invest capital that you do not need in the short term. Although ELTIF 2.0 creates more flexibility, not every asset manager offers the option of early redemption of shares.

Investment-specific risks: Depending on the focus of the ELTIF, there may be different risks, such as company-specific risks in private equity or construction and maintenance risks in infrastructure projects.

Pricing and evaluation: Pricing at ELTIFs can be challenging as they invest in unlisted companies. The value of an ELTIF is therefore not calculated and published on a daily basis, which can lead to uncertainties. Regulatory requirements require an evaluation at least every three months.

Potentially higher risk: ELTIFs can be riskier than broadly diversified ETFs, particularly with a very specialized and focused approach.

ELTIFs: A look at returns and risks

The concept of elTIFs

ELTIFs serve as a framework for asset managers to sell illiquid investments within the EU. Since each fund contains different investment objects, both risks and returns vary. A typical feature of ELTIFs is their focus on illiquid tangible assets within the EU. This long-term orientation often entails an “illiquidity premium,” which promises higher returns for your patience as an investor.

Expectations for returns

Your return on ELTIFs depends heavily on the investment focus — that is, which asset classes the fund invests in. Some areas, such as private equity, private debt or infrastructure, often promise “outperformance” compared to standard investments on the capital market. This means that you may be able to perform better than the average on the capital market. You should note that forecasts, such as those from various banks in the private equity sector, are only estimates based on past data. They are no guarantee of future results and should be viewed as indicative and not as fixed expectations.

Risk overview

Investing always involves risk, and ELTIFs are no exception. The specific risks vary depending on the fund's investment focus. For example, an ELTIF may involve risky investments in private equity or more stable investments such as infrastructure projects. The regional focus on the EU can also be seen as a cluster risk.

The risks and expected target returns are always stated in the key information document. Detailed information on the specific risks can be found in the sales prospectus. Note that these risks can vary significantly depending on the fund strategy. For example, real estate investments are subject to different risks (such as vacancy) than a wind farm, which may be exposed to legal risks or natural disasters.

7 tips for your ELTIF investment

1. Diversification

Don't put all your eggs in one basket. A wide range of investment priorities helps you to minimize cluster risk in alternative investments. Diversification is essential for a healthy portfolio.

2. Keep an eye on fees

Costs and fees can reduce your return on investment. Pay attention to how fees are calculated, particularly with ELTIFs, where they are often deducted directly from the fund's net asset value. Also note possible performance-based commissions that could apply.

3. Experience counts: Asset manager with track record

With the new market opportunities come new providers. Care should be taken here. Rely on asset managers with proven success and years of experience to ensure that your money is in good hands.

4. Balance is crucial

Illiquid investments are exciting but also binding. They should therefore make up a maximum of 25 percent of your portfolio to avoid liquidity problems. A balanced distribution of your investments is crucial.

5. Review withdrawal policies

ELTIFs are designed for the long term, but some offer flexible take-back arrangements. Find out about options to sell shares early, taking into account possible restrictions.

6. Payouts as a plus

Distributing ELTIFs can be attractive as they provide you with regular income during the investment period. Whether this is relevant to you depends on your personal preferences.

7. Find out thoroughly about the risks

It is essential to obtain detailed information about the risks of the various ELTIFs. Each fund has its own risk profile, depending on its investment focus and composition. The key information document is a valuable tool here: It gives you a detailed overview of the fund's risk category and explains specific risks. Regular quarterly reports are also an important source of information. They give you an insight into the development of the fund and the investments made by fund management. This information is crucial to realistically assess and understand the risks of your ELTIF investments.

Conclusion: ELTIFs in the new light of the “ELTIF 2.0" reform

With the introduction of “ELTIF 2.0", we are experiencing a significant change in the world of ELTIFs. This reform is a real turn of events: Previously limited by high regulatory hurdles and limited market presence, ELTIFs are now also open to you as a retail investor. This opening not only offers you new opportunities, but also asset managers, who can now act more flexibly.

What does that mean for you in practice? First of all, getting started has become easier: No more minimum investments, less bureaucracy. This also means more leeway for providers. Compared to traditional investments such as equities, ELTIFs promise more attractive returns and more stable performance, which enables improved risk diversification and diversification of your portfolio.

However, you must not ignore the risk. The composition and focus of ELTIFs is diverse, which means that both risks and returns can vary. As a smart investor, you should be aware that there are different investment priorities behind every ELTIF. This diversity entails specific risks, which vary depending on fund focus and composition.

The most important thing is that you know your own willingness to take risks. ELTIFs can be an excellent addition to your portfolio, especially if you're more experienced and looking for long-term, diversified investment opportunities that offer potentially higher returns. In the world of ELTIFs, this opens up new, promising horizons for your investment decisions.

It is important to understand that all yield forecasts involve uncertainty. Past performance is not a reliable indicator of future results. Any investment decision should be carefully considered, taking into account the fact that markets can be volatile and investment returns fluctuate.

FAQ

What are ELTIFs?

ELTIF stands for “European Long-Term Investment Fund” and is a fund structure specifically for illiquid alternative investment funds in the EU. They are intended for asset managers who invest in non-liquid assets such as roads, wind farms or company investments. For you as a private investor, ELTIFs offer you the opportunity to invest in non-exchange-traded investments within the EU within a protected framework. Typical asset classes in ELTIFs include private equity, private debt or infrastructure projects.

What does ELTIF 2.0 mean?

ELTIF 2.0 marks a significant reform of the existing ELTIF structures. As a small investor, this reform opens the door to alternative investment funds in the EU. Key changes: The minimum investment amount has been abolished and the ELTIF-specific eligibility test has been adapted to MiFID tests for other financial products. This means more flexibility for you, as you can now sell your shares more quickly without being tied down for years.

What are the benefits of ELTIFs?

ELTIFs can offer attractive returns, often even higher than average capital market returns. In the private equity sector in particular, experts expect double-digit annual returns. ELTIFs are also often more stable than the capital market, as they operate independently of its fluctuations. This and their low correlation with the capital market make them an ideal tool for diversifying and diversifying risk in your portfolio.

How do ELTIFs make money?

ELTIFs generate income by investing in long-term, illiquid assets that represent concrete physical assets, such as real estate, companies, or solar systems. They benefit from the positive performance of these investments and from the cash flows generated by these investments.