Ireland Adopts Strategic Embrace of ELTIF 2.0

Authored by: Andrea Lennon, Head of Client Service, Ireland
Updated on: May 8, 2024

Originally Published in Thomson Reuters

Ireland is positioning itself as a prime domicile for European Long-Term Investment Funds (ELTIFs) in the light of the forthcoming ELTIF 2.0 Regulation set to take effect on Jan. 10, 2024.

A consultation is underway for the proposed Chapter 6 in the AIF handbook, which runs from Nov. 1 to Dec.13, 2023.

Following consultative meetings between industry representatives and the Central Bank of Ireland (CBI), a dedicated ELTIF chapter, Chapter 6, has been proposed for inclusion in the Alternative Investment Fund (AIF) Rulebook.

ELTIF: Brief Overview

The ELTIF is a pan-European regime designed to channel long-term capital into the real economy. It aims to provide investors, including retail investors, with long-term, stable returns while simultaneously fueling economic growth and job creation.

The ELTIF is particularly primed for financing infrastructure, real estate projects, and unlisted companies that are not traded on a regulated market. With the maturing trends in the 'retailisation' of private funds, ELTIFs are increasingly becoming the "go-to" product option for distributing private market and real asset strategies.

The first version of ELTIF has relatively little take-up, however. The ELTIF 2.0 Regulation aims to revitalize long-term investment vehicles in Europe, offering more flexibility and broader appeal to both fund managers and investors.

The ELTIF 2.0 Regulation, officially known as Regulation (EU) 2023/606, was published on March 20, 2023 and is set to come into effect on Jan. 10, 2024. This updated regulation amends the original ELTIF framework from 2015, aiming to better channel non-bank capital into long-term projects and small and medium-sized enterprises (SMEs).

CP155 Consultation & Chapter 6

The CBI's Consultation on ELTIF chapter in the AIF Rulebook (CP155) introduces Chapter 6 of the AIF Rulebook.

The new Chapter 6 will comprise two parts:

Part I includes:

• ELTIF restrictions;
• Supervisory requirements;
• Prospectus requirements;
• General operational requirements; and
• Requirements regarding financial reports.

Part II deals with requirements related to the marketing of ELTIFs to retail investors.

The CBI invites feedback on specific questions concerning the proposed rules.

Main Changes in ELTIF 2.0

As these changes to the AIF Rulebook unfold, the CBI will maintain a continuous dialogue with industry stakeholders.

Investor base: The new regulation allows ELTIFs to attract both professional and retail investors across all 27 EU member states, removing previous investment minimums and portfolio percentage constraints for retail investors.

Asset eligibility: The range of eligible assets has been expanded, and now only 55% of an ELTIF's net assets need to be eligible, down from 70%.

Eligible enterprises: Fintechs are now included and the market capitalization limit for listed companies has been raised to 1.5 billion euros. Rules for third-country companies have also been relaxed.

Real assets: The economic or social benefit requirement and the 10 million euros minimum investment threshold have been removed.

Fund shares: Now, UCITS and AIFs managed by European AIFMs are eligible, along with ELTIF, EuVECA and EuSEF shares.

Investment rules: The regulation simplifies investment policy and portfolio composition; this includes raising the concentration limit to 30% for an underlying fund and allowing more flexibility in borrowing requirements.

Indirect strategies: ELTIFs can now act as feeder funds to other master ELTIFs and fund-of-funds structures are more flexible.

Why Ireland?

Ireland has long been a hub for asset management and investment funds in Europe. The country offers several advantages that make it an ideal domicile for ELTIFs:

Regulatory expertise: Ireland's Central Bank has a robust regulatory framework and a deep understanding of the asset management industry.

Global reach: Ireland is the domicile for 5.9% of global investment fund assets and the second largest in Europe. With net assets in Irish-domiciled funds reaching 3.7 trillion euros in 2022, Ireland's reach is hard to ignore.

Skilled workforce: The country has a highly skilled workforce in the financial services sector, which can provide the necessary expertise for managing ELTIFs.

Strategic location: Ireland's geographical location and use of the English language make it a convenient bridge between the U.S., UK, and European markets.

Irish ELTIF Structure

The Irish ELTIF will be a standalone product and therefore will not need to be separately authorized as a Retail Investor Alternative Investor Fund (RIAIF) or a Qualified Investor Alternative Investor Fund (QIAIF).

The authorization process for an ELTIF is expected to broadly follow the existing authorization processes in place for RIAIFs and QIAIFs. An Irish ELTIF can be established in many forms of the Irish fund structure such as an ILP, ICAV, CCF, Unit Trust or PLC. It is likely, however, that the ICAV and ILP will be the favored structures. The main attributes of these two structures are set out in the table below:

Loan Origination Update

The Central Bank has updated its regulations, specifically ID 1084, concerning the loan origination framework for QIAIFs. The original exemption in ID 1084 allowed QIAIFs to issue loans to their wholly-owned subsidiaries. The revision expands this exemption, now permitting QIAIFs to also provide loans to co-investment vehicles where the QIAIF holds a majority stake.

This lending activity must however be secondary to the QIAIF's primary investment strategy, ensuring that the focus of the fund remains on its principal investment activities.

Next Steps

The CBI will keep its consultation on ELTIFs open from Nov. 1 to Dec. 13, 2023. The European Securities and Markets Authority (ESMA) is expected to publish technical standards for ELTIF 2.0 by Jan. 10, 2023; they are currently under consultation. These will provide further clarity on aspects such as the minimum holding period, liquidity management, and conditions for capping redemptions.

Published on: May 1, 2024