European Long-Term Investment Funds (Eltifs) can offer an appealing alternative to investors seeking private market returns outside of a closed-ended fund structure, but new regulations mean they will be unlikely to offer the same illiquidity premiums as trusts, and also carry higher fees, according to research from Morningstar.
In the report Eltifs Step Into the Spotlight, Morningstar Insights teams explored the “growing breed” of products, which were initially designed by the European Commission to provide retail investors with access to private assets.
The report said the vehicles are “finally picking up steam” after recent changes in regulations – the so-called Eltif 2.0, which reduced the minimum exposure to illiquid assets from 70% to 55%.
This, Morningstar said, allows the possibility of ‘evergreen’ Eltifs, which are effectively open-ended and built to accommodate ongoing, though limited, inflows and outflows. This fund structure is likely to appeal to a broader investor base as an alternative to closed-end fund structures traditional for private-markets strategies.
However, the report found Eltifs on average carry significantly higher fees than comparable public-market products, and many charge performance fees. It also warned that many Eltifs coming to market will “likely not be able to harvest the same hefty illiquidity premiums” that have historically driven private-market returns.
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Further, the lack of disclosure across team composition, portfolio holdings, investment process and performance is another hurdle for fund selectors and advisers.
For investors, it is crucial to carefully assess the liquidity terms, the underlying strategy, and the track record of the manager when considering an Eltif investment,” commented Mara Dobrescu, director of fixed income ratings, Morningstar.
“For instance, are they entrusting their capital to a good steward with an investor-friendly culture and practices, or a firm that has jumped on the bandwagon of the latest trend without much consideration? Investors also risk overestimating the potential after-fee returns while underestimating the liquidity risks of Eltifs. While Eltifs have their advantages, there is much for both investors and fund managers to be thinking about.”
The report also highlighted the different skillset needed to invest in private markets and said asset managers will need to invest in expanding their resources and capacity to deliver successful Eltif products.
“The convergence of private and public markets is expected to dominate asset management discussions in the coming years,” Dobrescu added. “Private markets demand a distinct skill set compared to traditional investments, and asset managers will likely need to scale up their capabilities significantly to deliver successful ELTIF products.”
Launches
Some 70 asset managers across Europe have so far launched Eltifs but as many are hesitant to share data related to their Eltifs, calculating the current size of the market is tricky – estimates are around €20bn as at the end of 2024. Italian asset manager Azimut has the highest number of Eltifs at 21, while Amundi, BlackRock, and PGIM currently have 14, seven and six respectively.
The regulatory changes have also prompted more launches in 2024 then the previous three years combined, “a notable evolution”, the Morningstar report said.
Private credit was the most popular asset class of the four main private markets sectors (private equity, private credit, infrastructure, and real estate) for the launches, having recently overtook private equity.
“Meanwhile, infrastructure funds and multi-asset strategies, combining exposure to both private equity and private credit, have recently started to gain traction,” the report said. “On the other hand, real estate remains a small niche within the Eltif universe, perhaps owing to the existing availability of real estate funds within the Units market.”
This article originally appeared in our sister publication, Portfolio Adviser
