ELTIF Delegated Regulation: Main Elements

Following the lengthy process of drawing up technical standards, on July 19, 2024 the European Commission has finally adopted Regulatory Technical Standards (RTS) under the revised European Long-Term Investment Fund (ELTIF) Regulation, also known as ELTIF 2.0. These standards have been long awaited by the asset management industry and are poised to boost the ability of asset managers to roll out the new generation of ELTIFs 2.0. Here’s an overview of the main aspects of the newly adopted Delegated Act.

Liquidity Management Tools

Anti-dilution tools

The revised RTS introduce detailed rules on redemption policies and liquidity management tools. ELTIF managers are no longer required to implement at least one anti-dilution tools, such as anti-dilution levies, swing pricing and redemption fees.

Redemption frequency

The Delegated Regulation does not contain limitations on the redemption frequency. However, asset managers must "justify" to the competent authority of the ELTIF the redemption frequency if redemptions take place more frequently than on a quarterly basis.

Notice period

Additionally, the Delegated Regulation does not contain limitations on the notice period. Where the extended notice period of the ELTIF is less than 3 months, the ELTIF manager is expected to "inform" the ELTIF competent authority and provide reasons for such shorter notice period and provide additional explanations on the compatibility of the notice period with the individual features of the ELTIF.

Redemption Policy

The ELTIF managers of open-ended ELTIFs can choose the methodology to calibrate the percentage of ELTIF's "liquid" assets based on either the redemption frequency and the notice period of the ELTIF, or the redemption frequency and the minimum percentage of "liquid" assets.

The "secret sauce" of ELTIFs 2.0 is hidden in Annex I and Annex II. These Annexes determine the liquidity calibration that ELTIF managers can select:

Matching Mechanism for Transfers

To enhance flexibility for investors, the RTS include provisions for a matching mechanism that allows for the transfer of shares or units between exiting and potential investors. This mechanism facilitates smoother transitions throughout the life-cycles of ELTIFs and offers exit opportunities throughout the ELTIF’s lifetime without necessitating asset sales or cash disbursements.

Cost Disclosure and Calculation Methodologies

The RTS also address the disclosure of costs, specifying the calculation methodologies for costs borne by investors and the presentation of these disclosures. The common methodology is intended to help investors make more informed decisions and enhance trust in ELTIFs.

Use of Financial Derivative Instruments

The RTS set criteria for the use of financial derivative instruments, ensuring they are employed solely for hedging purposes. This measure aims to mitigate risks associated with derivative use while allowing ELTIFs to manage their portfolios effectively.

Implications for Asset Managers

The newly adopted Commission Delegated Regulation provides asset managers with greater flexibility in managing ELTIFs. This flexibility is expected to make ELTIFs more attractive to a broader range of investors, including retail investors, thereby expanding the market for these funds.

Next Steps

With the official adoption of the Commission Delegated Regulation the European Parliament and the Council have a three-month period (with a possible three-months extension) to "scrutinise" the RTS.

In the meantime, asset managers and market participants should stay informed about these developments to align their strategies with the new regulatory framework. The newly adopted ELTIF RTS mark a significant step forward in enhancing the flexibility, transparency, and attractiveness of ELTIFs.