ELTIFs special report: The road to retail

ELTIF 2.0 promises to open up the private assets market to retail investors, but not quite yet. Kathryn Gaw investigates…

There has been a flurry of European Long-Term Investment Fund (ELTIF) launches in recent months, sparking fresh conversations around the potential reach of the product – and its investors.

When ELTIF 2.0 debuted in January 2024, it was hailed as the fund structure that would bring private asset investments to the masses. With enhanced liquidity and transparency features, the ELTIF was designed with the global wealth market in mind. Private credit analysts have long speculated that the future growth of the sector lies in the portfolios of high-net-worth individuals (HNWIs) and their wealth managers, as well as sophisticated retail investors seeking diversification.

Earlier this year, research from Novantigo found that the size of the global private wealth market for private markets strategies could be worth between $10tn (£7.71tn) and $13tn by 2032. As private credit rates begin to come down, it makes sense that fund managers are already thinking about how to expand their distribution channels beyond their usual institutional investor base and bring in new sources of funding.

In the year to date, ELTIFs have been launched by BNP Paribas Asset Management, Pemberton, M&G and PGIM, to name just a few. According to the ESMA register, there were 139 ELTIFs registered as of October 2024 – up from a relatively paltry 25 in 2020. Certainly, the fund structure is growing in popularity. But across Europe there is a sense that the ELTIF has yet to reach its full potential.

For a start, ELTIF 2.0 has had a slower-than-expected roll out. Although it launched in January, the regulatory technical standards (RTS) which provide important additional details to supplement the product have not yet been officially adopted. This has led to some uncertainty in the market.

The initial version of the RTS was rejected, before being updated in July. This updated version is expected to have been formally adopted by the end of the year, and the data suggests that many fund managers were holding off on launching their ELTIFs until after these regulations had been finalised.

Before the publication of the updated RTS, there were approximately 40 ELTIFs listed on the ESMA database. But between July and October of this year, almost 100 more ELTIFs have hit the market, and experts believe that there are plenty of other fund launches waiting in the wings.

James Abram, principal consultant at Temenos Multifonds, says that the delay in the publication of the RTS led many managers to hold off on imminent launches until there is more clarity around distribution.

“I think people are still trying to figure out how to access the genuinely retail capital for these types of products,” says Abram. “It’s about connecting what we have in the traditional retail space to the private asset managers and getting them comfortable with that distribution.”

Private credit fund managers do not have much experience working with retail investors, and they are currently quite limited in their distribution channels. Some are opting to use investment platforms such as Moonfare, while others are targeting the wealth management market via broker networks or private banks.

Sam Boughton, head of EMEA and director of Moonfare UK believes that the ELTIF cannot be considered a “pure retail” product just yet, as fund managers are still only seeking out big ticket investors.

“These are clients that have got a private banking relationship,” he says. “They’ve got however many hundred thousands of euros, dollars, or pounds being managed by their bank, and then they might integrate some private markets, as opposed to a retail investor putting €500 (£416) in a private markets product.”

In reality, no ELTIF yet offers an entry point as low as €500. The ‘cheapest’ ELTIF on the market at the time of writing is Swiss Life’s Privado Infrastructure Fund, which comes with a minimum investment threshold of €1,000. However, the majority of ELTIFs have a threshold of €10,000 or higher, making them more suitable for HNWIs and sophisticated investors, rather than the average individual investment portfolio.

It is likely that the financial barrier to entry will come down over time, but fund managers appear to be in no rush to take on the administrative responsibility of retail investors.

“As soon as you start to target these types of investors, the regulatory burden becomes that much more imposing,” says Abram.

“That’s hindering growth for the ELTIF. Does a mid-size LP really want to deal with multiple tens of thousands of investors with all of the AML, KYC and due diligence requirements that go with them? All of that stuff is going to be brand new to a lot of these guys. And it’s a real challenge.

“What we’ve seen at Multifonds is that the appetite for ELTIF and ELTIF administration appears to really be with the tier one and tier two players. It’s not with the mid-sized and smaller boutique houses.”

Pan-European passporting has added to the challenge of distributing ELTIFs, and made the cost of roll-outs more expensive. Passporting regulations were built into ELTIF 2.0, but local jurisdictions can still undercut the European rules. France, Spain and Italy are among the domiciles that have added their own ELTIF requirements, which means that fund managers seeking to distribute their products in those countries must effectively operate under a double regime.

“ELTIF is a European regulation and is thus harmonised by definition from a regulatory perspective,” explains Serge Weyland, chief executive of the Association of the Luxembourg Fund Industry (ALFI).

“However, hurdles for accessing certain markets can exist as some tax advantages are only granted to local domiciled funds. Additionally, restrictions exist in non-financial regulations, for example in France where life insurance policies are restricted to local domiciled funds.”

“In France they do make it quite difficult for passporting, particularly of ELTIFs,” agrees Abram.

“Although there is a European regime, typically, in France, there will be additional hoops that you have to jump through. I understand that it’s nigh-on impossible to distribute ELTIFs to retail in France, even under ELTIF 2.0.”

As a result, only the largest private market players can afford to be the first movers of the ELTIF regime. €2tn asset manager Amundi is the only fund manager to have ELTIFs registered in three jurisdictions: France, Italy, and Luxembourg. BNP Paribas Asset Management and Eurazeo both have ELTIFs in France and Luxembourg. These three firms are the only multi-jurisdiction ELTIF managers as of yet.

In the absence of retail investors, institutions appear to have identified the ELTIF as an efficient vehicle for their private market investments. ELTIF 2.0 brought the fund structure into alignment with the distribution requirements of MiFID 2, so would-be investors such as insurers and banks are already familiar with the rules.

“There has been a noticeable rise in the number of insurers and banks choosing ELTIFs,” says Antonios Nezeritis, investment funds partner at Ashurst.

“Certain national legislators use the updated ELTIF regime to promote their insurance products through the creation of ELTIFs.”

Institutional investors can also use ELTIF investments to gain access to a higher level of liquidity than traditional private credit funds afford. In fact, one industry insider told Alternative Credit Investor that they are aware of some instances where institutions have considered transferring their private credit allocations into ELTIFs. However, on the whole, institutions are comfortable with the illiquidity of private market investments, and are happy to accept limited liquidity in exchange for higher returns.

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While insurers and banks are financing this first tranche of ELTIF launches, the general consensus is that the future of the ELTIF lies squarely with retail investors, and what they want is liquidity and access.

At the ALFI Private Assets Conference in September, the liquidity of ELTIFs was a topic of sustained discussion. Fund managers and fund administrators appear to be confidently preparing for an influx of HNWI and retail money within the coming years, and the convenience and growing availability of the ELTIF plays a key role in these plans.

The lack of retail money to date appears to be down to caution on both sides. ELTIF managers want to ensure that they are fully compliant with all incoming regulations before taking on the responsibilities of retail money. Meanwhile, retail investors are still learning about private market investments, and are likely unwilling to put €10,000 or more into an unfamiliar asset class.

“Europe has generally been a little bit behind the curve in terms of driving professional and retail investment into private assets,” says Abram.

“You can draw some comparisons between the ELTIF regulation and some of the regulations over in the US, particularly interval funds.

“Over the last few years, they’ve seen 10 per cent annual growth year-on-year in those interval funds with a market cap of over $80bn. If you’re looking for a predictive indication of where ELTIFs are going, that’s a very good one.”

The private credit sector is filled with people who are well used to taking a long-term view on their investment decisions. The ELTIF was first proposed by the European Commission way back in 2013, and it has taken more than a decade to finesse the fund structure and make it suitable for retail distribution.

Now that the regulations have been ironed out and the first wave of the new-look ELTIFs have launched, fund managers are looking at the horizon again. If Novantigo’s projections are correct, within the next decade there could be upwards of $13tn of retail money searching for a home in the private assets market and a well-established, well-distributed ELTIF market could meet these needs. Until then, fund managers and administrators have a little bit more time to smooth out the kinks and brace themselves for the unique challenges that come with non-institutional funds.