ELTIF 2.0 regulation unlocks access to private markets

The ELTIF 2.0 is a positive development for the high-net-worth investor base, however, financial institutions grapple with manual processes related to investments in private funds. Without industry-wide technological infrastructure to support increasing volumes of investors, managers will struggle to meet demand.

Here, we examine the benefits of the ELTIF 2.0 and explore the challenges that may arise for managers as a result of it. Technological innovation is crucial to overcoming these challenges and therefore maximising the potential of this new regulation to democratise private assets on an unprecedented scale.

The ELTIF regulation was initially launched in 2015 with the aim of increasing long-term investment in private assets by broadening the marketing audience across EU member states, under a marketing passport, to include individual investors.

However, it failed to achieve widespread adoption despite being well-received by the industry in principle. Eight years after the ELTIF was launched, in January 2023, the ESMA ELTIF register only referred to 84 ELTIFs.

The new ELTIF 2.0 provides several key updates to address the restrictions that still hinder individual investors under the original ELTIF.

• Broader scope of eligible assets: The definition of an eligible asset now includes European Union (EU) Alternative Investment Funds (AIFs) managed by EU AIF Managers and invested in ELTIF-eligible assets: simple, transparent and standardised securitisations, and certain green bonds.
• Less strict investment restrictions: The percentage of an ELTIF's capital that must be invested in eligible assets is 55% instead of 70%.
• Raising capital from retail investors: Retail investors no longer have to invest a minimum of EUR 10,000. The 10% cap on financial instrument portfolios not exceeding EUR 500,000 for retail investors is removed and the local facilities requirement is removed.
• Creating open-ended ELTIFs: ELTIFs can be structured as ‘de facto’ open-ended funds; the mandatory lock-up during the ramp-up period is removed and the lock-up period may be shortened.

With restrictions reduced, individual investors can enjoy greater access to private assets. Asset managers, in turn, benefit from a diversified investor base and more capital-raising opportunities.

However, high-net-worth clients act differently to institutional clients; it is important that managers understand their needs and have systems in place to manage them.

With increased opportunities also come increased challenges as managers face pressure from higher volumes of individual investors demanding access to private markets.

When onboarding clients, asset managers, often working for small numbers of large investors, still rely on manual or paper-based processing. However, manual processes cannot scale to meet demand.  The increasingly tech-savvy individual investor community also expect a digital, hassle-free onboarding journey. Therefore, it is crucial that managers adopt scalable, digitised solutions to investor onboarding.

It is commonly agreed that ELTIF 2.0 provides the framework to facilitate access to private assets for a growing investor base. However, this opportunity will only materialise if several key actions are taken to maximise on this potential.

First, individual investors looking to make allocations need easy access to private funds.

Second, this same market infrastructure needs to support asset managers to distribute their private funds to a larger number of both private and institutional investors. This requires a digital investment journey providing efficient and scalable investor onboarding. An aggregation service can pool together smaller allocations from individual investors into one subscription.

Euroclear FundsPlace® allows managers to distribute their private funds at scale. Asset managers can tap into the increased capital available from high-net-worth investors facilitated by new ELTIF 2.0 regulations.

They can leverage Euroclear’s global distribution agreements and access Euroclear’s existing network of more than 2,000 distributors, making their private funds discoverable to a deep and diverse pool of investors. 

This creates legal efficiency and scalable distribution, as fund managers can distribute to more private banks and wealth managers, and distributors can offer an ELTIF to clients without needing to sign a new agreement.

With streamlined processes provided through digitised market infrastructure, asset managers can take full advantage of new ELTIF 2.0 regulations and tap into the widening investor base. Not only does this solution help the private markets industry grow its Assets Under Management (AUM) but it allows investors to diversify their return and risk profiles at a time when markets are becoming increasingly unpredictable.

On the investor side, the development of market infrastructure will allow distributors to access private funds in the same way they currently do mutual funds and exchange-traded funds.

Access to private funds is facilitated by a single-entry point for both institutional and individual clients. This means they do not need to adopt new technology or processes to access private funds but can do so in the same way that they would normally access mutual funds.