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new cross border fund structure on its way

The European Commission has introduced plans to create a new type of investment fund for illiquid assets, which can be passported around Europe


Kira Nickerson

The proposed European long-term investment fund (ELTIF) is likely to have characteristics of both Ucits and closed-ended funds, sitting in the middle ground between the two.

According to the proposals, eligible assets in the ELTIF would be those classed as “alternatives” but which also depend on investors’ long-term commitment for their development. These include real estate, unlisted companies and infrastructure projects.

“The mere fact that an asset is not traded on a regulated market will qualify it as a long-term asset,” the proposals note.

Investor benefits

Under Ucits, mixed asset funds face restrictions on the inclusion of certain assets. The ELTIF could enable more flexible multi-asset portfolios, allowing managers to invest in a broader mix of assets alongside stocks and bonds.

The structure is likely to appeal to institutional investors and pension funds, but there are benefits for retail investors, Peter Grimmett, the head of fund regulatory development at M&G, explained.

“Individual retail investors faced with a future liability might benefit from the yield or regular returns offered by long-term investment funds,” he said.

The proposals are at the draft stage and lack detail, Grimmett added. Key questions over the ELTIF’s design remain unanswered, including redemption frequency, given the illiquid nature of the assets likely to be held within the structure.

The proposals suggest the ELTIF will invest some 70% in long-term assets, with the remaining 30% in Ucits-type investments to add liquidity.

In addition they outline an intention for the ELTIF to include investor protections similar to Ucits, such as limited use of leverage and derivatives, and restrictions on stock lending.

Regulation or directive?

Grimmett explained the rules are being discussed as a regulation instead of a directive, such as Ucits. A regulation allows little scope for EU member states to change the rules at the national level, whereas a directive can be altered to fit with individual domestic regulations.

He said: “A lot of EU initiatives are now coming this way, as regulations instead of a directive, as the authorities are getting tired of the various member states making changes.”

Considering the weight of regulations coming from Europe there are questions over how long it will take for the new structure to become a reality. Grimmett said it is unlikely to take long.

He believes the proposals mark a new stage in European initiatives and fit with the Commission’s desire to be more proactive, in the wake of the financial crisis.

A version of this article first appeared on the website of Portfolio Adviser, a sister publication.