Introducing ELTIF 2.0
Private markets have grown significantly since the Global Financial Crisis, but have historically remained the preserve of institutional investors such as pension funds, insurance companies, foundations and endowments. Today, thanks to favourable regulatory changes, such as the European Long-Term Investment Fund (ELTIF), individual investors can now access these opportunities, which have been a mainstay of institutional portfolios thanks to their
risk-adjusted reward potential. However, for individual investors private assets can appear complex, given their inherent liquidity restraints. Navigating these challenges needn’t be a barrier to entry. Here at M&G we have been investing in private markets for over 25 years. As a long-term, trusted partner for our clients, we understand how to harness opportunity across all market cycles to deliver optimal outcomes for our investors.
Why invest in private assets?
The private assets landscape can be complex and difficult to navigate – which is why an actively managed fund such as an ELTIF could play a crucial role in enabling a wider investor demographic to reap the potential benefits. The main reasons for investing in these strategies are threefold:
Diversification
Private markets strategies can diversify portfolios by offering access to a broad range of investments such as small and medium sized companies or projects as well as mature business models with visible cashflows.
Higher, risk adjusted returns
Private market strategies have low correlation with public markets and potentially reduce overall portfolio risk. There is also the potential for higher returns compared to traditional markets as these strategies are often comprised of investments that may lead to significant gains over time.
Sustainability considerations
The inherent exposure to assets that carry the potential to address ESG (Environmental, Social and Governance) challenges may promote a sense of ownership for investors with a concern for how their capital is being put to use.
What is an ELTIF?
European Long-Term Investment Funds, or ELTIFs, were introduced to encourage investment in Europe’s real economy, channeling capital towards core areas such as infrastructure and real estate, while advancing the democratisation of private assets.
ELTIFs offer exposure to traditionally hard-to-access asset classes including private credit and private equity. Designed to promote long-term investment, the cross-border vehicle can support economic growth, the creation of jobs, and the development of sustainable projects across the European Union.
The first iteration of the regulation was introduced in 2015, but uptake has been slow due to high minimum investment requirements. A revamped version of the investment framework – ELTIF 2.0 – is effective as of 20 January 2024 and seeks to enhance the attractiveness of the vehicle.
How could ELTIF 2.0 benefit investors?
Through the ELTIF framework, a wider group of investors can now gain exposure to typically illiquid and long-term investment opportunities that may offer attractive returns over time. The latest version of the framework permits minimum investments from €10,000, with an even wider pool of options available for minimum investments of €25,000.
With the introduction of ELTIF 2.0, diversification can also be achieved at a structural level. Under the new regulations, ELTIFs can invest entirely in other funds, including other ELTIFs and EU Alternative Investment Funds (AIFs). Previously, such investments were limited to just 20% of assets. This allows ELTIFs to be structured as ‘funds of funds’ – enabling managers to balance risk by diversifying through different funds.
By design, the investment framework may help investors fulfill their long-term investment goals, such as planning for retirement or saving for major life events. As ELTIFs typically have longer investment horizons, they allow investors to participate in projects or sectors that require so-called ‘patient capital’, potentially providing investors with the long-term growth and value creation of the underlying assets.
Accessing the private credit spectrum
- Robust fundamentals in a higher rate environment
- Broad spectrum
- Less subject to swings in sentiment
- Underlying assets with a floating rate structure
- Strong, embedded sourcing relationships with company owner
Private credit is an asset class that has historically shown resilience in an environment of higher rates and other challenging conditions.
Within the broad spectrum of private credit, there are very different underlying risks and performance drivers which can provide opportunities for investors seeking a secure income stream at different stages of the cycle.
As private debt is not bought and sold on the public markets, it is less subject to swings in sentiment. So, as an inherently long-term asset class, private credit lends itself to both riding out public market turbulence and to the ELTIF structure itself.
Unlike conventional bonds which typically suffer in a rising rate environment, liquid corporate private credit is almost entirely floating-rate, offering not only inflationary protection but a potential way of benefiting from any future increase in interest rates.
Access to corporate private credit requires strong, embedded sourcing relationships with company owners and specialist market participants to seek the best opportunities, making it difficult for non-institutional investors to invest.
ELTIFs are illiquid in nature because their investments are long term. For investors, this is an investment that has low liquidity. ELTIFs may not be suitable for Investors that are unable to sustain such a long-term and illiquid commitment. Only a small part of a portfolio should be invested in an ELTIF.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. The views expressed on this webpage should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance.