On 3 February 2021, ESMA sent a letter to the European Commission concerning “Review of the Regulation (EU) 2015/760 on European long term investment funds” (the “ELTIFs” and the “ELTIF Regulation” or the “Regulation”).
The letter fits into the context of the impending review of the ELTIF Regulation; it responds to the Commission’s letter to ESMA dated 27 October 2020 on the functioning of the ELTIF framework and aims at meeting the requests for input from ESMA as per Article 37 of the Regulation itself.
After consulting ESMA and stakeholders, the Commission will submit to the European Parliament and Council a report assessing the functioning of ELTIFs in the context of the Capital Market Union and proposing a review of the ELTIF Regulation.
The letter contains two Annexes. Annex I provides a quick overview on the ELTIF market, based on ESMA data.
This overview shows a low number of ELTIFs domiciled in Europe (25 - of which 8 not yet marketed - as of the date the survey was conducted) but an increase in the trend of the authorisation requests.
Annex II focuses on some areas that could be appropriate to improve in order to better address market and industry expectations. In ESMA’s view the update of the Regulation should take into account:
- the main focus of ELTIFs legal framework, that was to boost European long - term investments in the real economy, such as transport infrastructure, sustainable energy generation or distribution, social infrastructure (housing or hospitals), the roll-out of new technologies and systems that reduce use of resources and energy, or the further growth of SMEs;
- the need to achieve the right balance between both professional and retail investors, by making the investments more flexible on the one hand and ensuring adequate standards of protection for retail investors on the other;
- the role that ELTIFs could play post pandemic, as vehicles to accelerate recovery by investing in the real economy.
The areas ESMA identifies to be improved are as follows:
- The authorisation process; in particular ESMA suggests removing the obligation for AIFMs to receive a specific approval to manage an ELTIF;
- Eligible assets and portfolio composition; ESMA makes a variety of proposals, in general aimed at broadening the investment universe of the ELTIFs, including allowing an ELTIF invest in other funds that are not ELTIFs, changing the risk diversification requirements and allowing investment in non-majority owned investments;
- Functioning of the ELTIFs - redemption rights and disposal of the assets; in particular, ESMA highlights that there might be merit in fostering mechanisms to allow the investors to exit before the end of the life cycle of the fund;
- Disclosure to investors - prospectus and cost disclosures; ESMA is of the view there might be merit in reducing the mandatory information to be included in the prospectus. Moreover ESMA proposes rewording options so as to avoid potential uncertainties on the cost disclosures between the ELTIF Regulation and PRIIPS Delegated Act;
- Local physical presence; ESMA proposes to remove the requirement to put in place facilities, in each Member State where the ELTIF intends to market its units/shares to retail investors;
- Other areas highlighted for possible change by ESMA included: considering the merit of creating ELTIFs specifically dedicated to professional investors, the creation of a favourable tax treatment across the EU and the standardisation of the eligibility criteria for investors in order to be consistent with the EUVECA and EUSEF Regulations.