ELTIF 2.0 RTS & the Rise of Evergreen Retail Funds
A conversation between Alessandro D’Ercole, Deputy CEO of Adepa, and Raffaele Sansone, Partner at Gatti Pavesi Bianchi Ludovici
On 19 July 2024, the European Commission adopted the final version of the regulatory technical standards (“RTS”) for Regulation (EU) 2015/760 as amended, known as ELTIF 2.0 Regulation. The new rules will facilitate the introduction of innovative investment schemes with a substantial impact on the asset management industry. Our Deputy CEO Alessandro D’Ercole spoke with Raffaele Sansone, Partner at Gatti Pavesi Bianchi Ludovici, to understand the impact of these changes and the opportunities they present.
Alessandro: On 19 July 2024, the European Commission adopted the Regulatory Technical Standards (“RTS”) relating to Regulation (EU) 2015/760, as amended. Is the ELTIF 2.0 reform process complete with the publication of the RTS?
Raffaele: The RTS represent the final stage of the reform process for the new generation of European long-term investment funds (ELTIF 2.0), facilitating the advent of so-called “evergreen funds“, which may be considered the new frontier of private market investments.
Evergreen funds are investment funds that combine exposure to alternative asset classes, including private equity, private debt, infrastructure and venture capital with the need to have liquidity events prior to the fund’s maturity.
RTS are fundamental as they provide the necessary framework for managers to construct products with periodic exit windows for investors (“redemption gates”), thus overcoming the distinction that exists in many European countries (including Italy) between open-ended and closed-end funds.
A: In light of this potential exit for investors, the new ELTIFs will need to have in place redemption policies in accordance with the RTS, correct?
R: That is indeed the case. The manager of the ELTIF 2.0 will be required to provide a redemption policy that includes, among other things, information on the frequency and duration of redemptions, as well as the conditions and procedures for dealing with redemption requests.
Additionally, the ELTIF 2.0 manager will be responsible for managing liquidity in accordance with expected redemption requests.
A: Is there a limit on the maximum amount that can be redeemed?
R: For each redemption gate, the maximum aggregate amount that may be redeemed by investors shall be determined based on the ELTIF’s liquid assets at the redemption date (including the expected cash flow forecasted on a prudent basis over 12 months) (“Liquidity“).
In this respect, the overall investor’s right of redemption is limited within a specified percentage of Liquidity.
A: Could you please explain how this percentage is calculated?
R: The percentage is determined by the AIFM in accordance with the tables attached to the RTS, which calibrate the relevant percentage based on the following elements:
- the redemption frequency (e.g. annual, semi-annual, quarterly, etc.) and the notice period given by investors to obtain redemption (see Annex I of the RTS for details of this “notice period method“); or alternatively,
- the redemption frequency (e.g. annual, semi-annual, quarterly, etc.) and the minimum percentage of liquid assets held by the ELTIF (see Annex II of the RTS for details of this “liquidity pocket method“).
In the first case, the model assumes that the ELTIF manager can liquidate investments in the period between the notice date and the redemption date. Thus, considering an ELTIF 2.0 with quarterly redemption gates as an example, a shorter notice period (e.g. 2 weeks) is expected to correspond to a lower percentage of redeemable Liquidity (i.e. 26.1%). Conversely, if the notice period is longer (e.g. 6 months), the percentage of redeemable Liquidity may also be higher (e.g. 50%).
In the second model, on the other hand, the existence of a liquidity pocket consisting of investments in liquid assets (the same ones in which a UCITS fund can invest) is relevant and this liquidity pocket must be higher in the case of more frequent redemptions. In practice, in the same example of a fund with quarterly redemption gates, the RTS require that an ELTIF 2.0 with a liquidity pocket of 20% can redeem 50% of the Liquidity. On the other hand, if redemptions are scheduled every 12 months or less frequently, the percentage of Liquidity that can be redeemed will be 100%.
A: It seems that the mechanisms outlined meet the expectations of the industry and can be a driver for ELTIF 2.0.
R: The RTS offer a tailored solution that provides asset managers with the flexibility to structure semi-liquid products in a way that best suits their needs. Much of the feedback from market participants (including the removal of the minimum initial holding period before redemptions can be made) have been incorporated into the new approach. It has been acknowledged that a ‘one size fits all’ solution would not be effective. As expected, managers now have a great flexibility to define the liquidity management strategy in line with the fund’s investment policy and to select appropriate anti-dilution liquidity management tools (“LMT“) (including anti-dilution redemptions, swing pricing, redemption fees).
The above changes are then combined with important enhancements that allow ELTIFs 2.0 to be used to implement fund of funds and/or co-investment strategies.
In this sense, ELTIF 2.0 represents the optimal model for addressing the needs of clients of private banking networks, which will be able to offer their clients, including non-professionals, access to this asset class while benefiting from the liquidity mechanisms described.
A: How can managers prepare for this challenge?
R: RTS present a significant challenge for asset managers, who must demonstrate investment capabilities in alternative asset classes and expertise in managing liquid assets.
In addition, in the case of semi-liquid ELTIF 2.0, it may be necessary to review internal processes and identify liquidity management tools that best suit the investment strategies and needs of investors. In order to implement advanced liquidity management tools, it will also be necessary to enhance operational systems.
A key role will be played by so-called “super ManCos“, which already have in-house expertise in both liquid and alternative investments, and more generally by service providers who can assist managers in managing relationships with retail clients interested in such products.
A: When will we see the first ELTIF 2.0 products compliant with the new RTS on the market?
R: The adoption of the RTS will certainly accelerate the introduction of ELTIF 2.0 semi-liquid products. The text of the RTS will now be subject to a 3-month scrutiny period by the European Parliament or the Council of the EU. If no objections will be raised, we expect publication and entry into force for Q4 2024. In any case, several competent authorities have already helpfully indicated to be willing to apply the definitive RTS ahead of the official application date.
We therefore expect 2025 to be the year of the evergreen ELTIF 2.0 funds.
In conclusion, the RTS for ELTIF 2.0 introduce new flexibility and opportunities in the investment fund industry. The regulations will enable managers to offer products that are better suited to the needs of modern investors, combining investments in alternative asset classes with more dynamic cash management. It is possible that 2025 will mark the beginning of a new era for evergreen funds, expanding access to these opportunities for retail investors as well.