The proposed European long-term investment fund (ELTIF) is likely to have characteristics of both Ucits and closed-ended funds, sitting in the middle ground between the two.
Ucits + Nurs
According to the proposals, eligible assets in the ELTIF would be those classed as ‘alternatives’ but also fall within a defined category of long-term asset classes whose successful development requires investors’ long-term commitment. This includes real estate, unlisted companies or infrastructure projects.
“The mere fact that an asset is not traded on a regulated market will qualify it as a long-term asset,” the proposals read.
Currently, many UK groups offering physical property funds do so via non-Ucits structures and as such the funds cannot be distributed outside the UK. Non-Ucits has also been a more attractive option for such funds due to the greater flexibility of its rules. Meanwhile most infrastructure funds being launched in the UK are using the investment trust structure.
Under Ucits, mixed asset funds have restrictions over the inclusion of certain assets and while Nurs goes further in this respect, the ELTIF may go even further. This has the potential to enable more flexible multi-asset portfolios, allowing managers to invest in a broader mix of assets alongside stocks and bonds, Peter Grimmett, head of fund regulatory development at M&G, explained.
The EC proposals noted the new structure is likely to appeal to institutional investors and pension funds but also noted there are benefits for retail investors.
“Individual retail investors faced with a future liability (home purchases, education or the financing of major renovations) might benefit from the yield or regular returns offered by long-term investment funds,” he said.
The current proposals, which are at the initial draft stage, are not yet that detailed and key questions over its design have yet to be answered, Grimmett added, while due to the liquidity issues surrounding the assets for which the ELTIF is being mooted it will likely have extremely limited redemption, but this has not yet been finalised.
A good piece of EC regulation
The proposals do suggest the ELTIF will invest some 70% in long-term assets with the remaining 30% in Ucits-type investments to potentially add liquidity. In addition the proposals outline the intention for the ELTIF to include investor protections similar to Ucits, such as limited use of leverage and derivatives and restrictions on stock lending.
Grimmett explained the rules are coming out of the EC as a regulation as opposed to a directive like Ucits. The difference being a regulation allows little scope for EU-member states to change the rules at the national level, whereas a directive can be altered somewhat to fit with individual domestic regulations.
He said: “A lot of EU initiatives are now coming this way as regulations instead of a directive as the authorities are getting tired of the various member states making changes.”
Considering the weight of regulations coming from Europe at the moment there is a question of the timing of this new structure and how long it will take to become a reality. Grimmett does not think it will actually take that long. He believes the proposals mark a new stage in European initiatives and sets the Commission’s agenda for the next five years, which is to look more proactively rather than reacting to the events of the financial crisis.
