ELTIF 2.0: Now private investors are investing like the rich
Investments outside the stock market are regarded as the “top class” for many investors, but until now this has primarily been reserved for institutional investors. The ELTIF 2.0 asset class, which was amended at the beginning of 2024, should now make it possible for any investor to invest in EU projects that promote infrastructure, sustainability or real estate development, for example. But ELTIF also has risks, which we will inform you about in this blog post.
What is ELTIF 2.0?
The abbreviation ELTIF stands for”European Long-Term Investment Funds”, which was drafted by the EU Parliament in 2015. To promote long-term investments, ELTIFs primarily invest in projects such as infrastructure, real estate developments and renewable energy as well as in private debt. Accordingly, these funds aim to generate returns over a longer period of time.
About a decade ago, ELTIFs were only available to wealthy investors. Back then, investors with a total portfolio of less than 500,000 euros were allowed to invest a maximum of ten percent in ELTIFs, with a minimum investment of 10,000 euros being required. Since January 2024, the ELTIF 2.0 concept has been in place, which allows private investors to purchase ELTIF shares without restrictions. The definition of eligible assets was also expanded to include additional asset classes such as FinTech, special securitized assets and green bonds. In addition, it enables more flexible handling of the minimum amount of tangible assets and the maximum amount of listed assets.
How can you invest in ELTIF?
ELTIFs are set up as alternative investment funds (AIFs) and are therefore legally speaking securities subject to specific regulatory requirements. The requirement of an ELTIF by the EU was also subject to various conditions: transparent costs, limited use of borrowed capital, custody capacity and high requirements for the fund manager in terms of diversification and type of investments. providers of ELTIFs such as Black Rock, Schroders, Union Investment, Commerz Real or Generali Investment emphasize that ELTIFs provide access to an attractive asset class that would otherwise not be available to many investors. It is also argued that ELTIFs offer a useful opportunity to diversify the portfolio.
What risks do ELTIFs pose to investors?
Despite the celebrated “democratization of private equity” by ELTIFs, this form of investment also has a number of disadvantages. These include long-term capital commitment, potentially high fees, a lack of transparency, and a vague return forecast. Once invested, capital typically remains tied up for years, and an early exit is often only possible via secondary markets with discounts. The amount of return also depends on the fund, its strategy, structure, performance and maturities, and a total loss is theoretically possible. For example, when the global economy collapses or completely unforeseen laws are passed. In addition, it is difficult even for professionals to fully understand the investment objectives and return prospects of ELTIFs. This can be particularly challenging for private investors without specific knowledge of energy or infrastructure projects.
For example, let's take the BlackRock Alternative Funds II. Its fund prospectus points out that “investors should assume that their money has been invested in the fund for at least eight years.” On the risk figure provided by BlackRock itself, the fund ranks 6 out of 7 points. It is therefore a long-term high-risk investment whose annual costs are estimated at 3.5%. In terms of return, BlackRock forecasts a wide range of between 0.7% and 37% per year, although it does not list what the ELTIF actually invests in.
Despite many ambiguities, a predicts Study by Scope, published in March 2023, an upward trend for ELTIFs. Experts estimate that in the mid-scenario, the European ELTIF market volume will rise to around 35 billion euros per year by 2028. This would mean a clear increase compared to the current level of around twelve billion euros. By way of comparison, at the end of 2022, ETF assets under management in Europe already amounted to almost 1.5 trillion euros. Compared to ELTIF, however, the popular asset class ETF rightly has many fans, as these funds usually invest in a very diversified and transparent manner, are extremely cost-effective and can be traded every trading day.
One reason for the possibly positive development of ELTIFs is likely to be the search of many private investors for diversification options for their portfolio beyond the stock market. Back in the 1950s, economist Harry Markowitz proclaimed a broad diversification of risk across various asset classes. As a result of technical and regulatory innovations, asset categories such as private equity are now also accessible to private investors. For example in the form of the said ELTIFs or digitized tangible assets that are traded via platforms such as FINEXITY.
