ELTIF 2.0 presents “interesting opportunities” for private credit

The second iteration of the EU’s European Long Term Investment Fund (ELTIF) presents interesting opportunities in the credit space, a legal expert has said.

The new regulations, known as ELTIF 2.0, came into force yesterday (10 January). They are designed to encourage private investors to put money into long-term, illiquid assets, including credit, which were typically the preserve of institutional investors.

ELTIF 2.0 is an update from the original ELTIF structure launched in December 2015, which was not very popular due to a lack of flexibility and limited range of eligible investments.

Read more: New long-term funds set to democratise private credit

Silke Bernard, global head of investment funds practice, Luxembourg at law firm Linklaters, said that “ELTIF 2.0 is creating a lot of appetite”, adding that she knows of around 40 structures in the pipeline at the moment.

“I think there are very interesting opportunities for ELTIFs in the credit space,” said Bernard. “ELTIFs have been made more flexible now, compared to the first iteration of the rules which were stringent in terms of leverage and currency matching. Quite a few of these rules have gone away.  Fintech start-ups within their first five years of authorisation are now eligible assets for funds following a credit strategy, whereas before there was a prohibition.”

Bernard said she is seeing the most ELTIF activity within private equity and private credit currently, in comparison to other long-term assets such as real estate and infrastructure.

Read more: M&G launches £500m private credit fund

She predicted that the ELTIF structure will “broaden the scale” of private credit by opening the asset class to a wider investor demographic.

“I don’t think it will eat up any of the current market but will really broaden the scope of eligible investors and then increase the cake,” she added. “Often, ELTIFs are being launched as parallel funds to institutional funds, so firms are broadening the scope of investors they can attract.

“We did some benchmarking and found that the fees on ELTIFs are pretty comparable to those on normal institutional funds, there’s just a small additional compliance cost.”

Elephant in the room

However, Bernard highlighted that the “elephant in the room” is the regulatory technical standards (RTS), regarding delegated acts on redemptions and liquidity topics, which is still not confirmed.

Consultations took place over Christmas but the rules were not finalised by the 10 January deadline.

Upcoming EU elections could delay approval further, leaving uncertainty hanging over ELTIFs until later in the year.

“The EU Commission (EC) has three months to endorse the rules or not, bringing the deadline to 19 March,” Bernard said. “However, upcoming EU elections mean that at some point the current EC will be barred from making legislative acts before the vote, so if we come into that period we may have to wait until Autumn 2024 for rules on delegated acts to be confirmed.”

Read more: Private debt funds special report

Delegated acts are only an issue for open-ended ELTIFs, so close ended ones should not be impacted by the final RTS.

“There are a whole range of ELTIFs that won’t be affected by the delegated acts rules,” said Bernard. “Those that are impacted can still be launched and approved in the meantime. For example, the Luxembourg regulator has said that it’s happy to approve ELTIFs with redemption features based on the ELTIF Regulation level 1. The only risk is that if and when the RTS come in an ELTIF will need to adjust features and disclosures to the then applicable rules.”