By Claire West
The European Commission has recently proposed a new investment fund framework designed for investors who want to put money into companies and projects for the long term. These private European Long-Term Investment Funds (ELTIFs) would only invest in businesses that need money to be committed to them for long periods of time.
The new Funds would be available to all types of investor across Europe subject to certain requirements set out in EU law. These requirements include the types of long-term assets and firms that the ELTIFs are allowed to invest in, for example infrastructure, transport and sustainable energy projects, how they have to spread their money to reduce risks and the information they have to give to investors. Any ELTIF manager would also have to comply with all of the stringent requirements of the Alternative Investment Fund Managers Directive to provide adequate protection for its investors.
Internal Market and Services Commissioner, Michel Barnier said: "We need to secure long-term financing for Europe's real economy. Currently, financing is often scarce and where it exists, too focused on short-term goals. The European Long-Term Investment Fund is an investment vehicle that will allow professional investors and individuals to invest long-term in European non-listed companies and in long-term assets such as real estate and infrastructure projects. Making ELTIFs available to all types of investors across the European Union is vital to maximise the pool of capital available to European companies. I hope that creating a new EU investment brand will gain the confidence of investors and companies alike."
Under the proposal, ELTIFs would have to meet a set of common rules so that they:
always have a depositary to keep assets safe;
comply with rules on spreading assets to prevent too much money going into one asset;
only use derivatives to manage currency risks in relation to the assets they hold, and not for speculation;
and obey limits on the amount they can borrow.
ELTIFs would invest in illiquid assets which are difficult to buy and sell. In addition, firms need to be confident the money invested in them will be there for as long as they have told investors they will need it. This cannot really work if investors are allowed to take their money out at any time. Therefore investors will not be able to withdraw money until the specified end date of their investment (this could be a date ten years or more after the money is invested). This must be disclosed clearly up front. In exchange for their patience, investors would benefit from the regular income stream produced by the investment asset and possibly collect an illiquidity premium.
This measure was announced by the Commission in the Single Market Act II communication in October 2012 and in the Green paper on Long-Term Financing of the European Economy.
The Commission engaged in extensive direct consultation and discussions with a wide range of organisations, and also through a written public consultation on investment management. There was a further consultation via a written questionnaire to targeted market participants, building on the information on long-term investments gathered from the public consultation. An Impact Assessment was concluded in 2013 where different policy options were considered for maximising long-term financing whilst ensuring a robust framework of investor protection measures.
ELTIFs are designed to meet the needs of institutional and private investors who are prepared to see their money tied into long-term assets, such as infrastructure projects, in return for a steady income. Pension funds and insurance companies are expected to be particularly interested in ELTIFs along with private investors who can afford to see some of their savings committed for a long period of time.