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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | octobre 2024
On 25 October 2024, the Commission Delegated Regulation (EU) 2024/2759 relating to European long-term investment funds was published in the Official Journal of the European Union (OJ). It enters into force on the day following its publication.
The Delegated Regulation contains regulatory technical standards (RTS) guiding ELTIF managers on how to apply certain requirements applicable to European long-term investment fund (ELTIF). The RTS deals in particular with the use of derivatives, the redemption policy and liquidity management tools, the circumstances for the matching of transfer requests of units or shares, the disposal of ELTIF assets and disclosures on costs.
The ELTIF product was launched in 2015 under Regulation (EU) 2015/760 (the ELTIF Regulation), with the intention of boosting long-term investment in private assets. It is basically a European label granted to an EU alternative investment fund (AIF) managed by an EU alternative investment fund manager (AIFM) that will allow that AIFM to market that AIF to any type of investors (including retail) across Europe.
Unfortunately, the ELTIF regime failed to attain widespread adoption due to certain strict requirements it was subject to under the ELTIF Regulation that were somewhat incompatible with the alternative investment universe. In fact, eight years after launch, the European Securities and Markets Authority (ESMA) had only registered 84 ELTIFs.
It was thus decided to amend and adapt some of the requirements of the ELTIF product to make it more attractive for asset managers (and investors).
Regulation (EU) 2023/606 amending the ELTIF Regulation (ELTIF 2.0) entered into force on 9 April 2023 and has applied since 10 January 2024.
The ELTIF 2.0 regime introduced new possibilities and flexibilities for this investment product.
The scope of eligible assets and investments has been clarified and broadened, with among others, the possibility for an ELTIF to invest into other EU AIFs managed by EU AIFMs investing themselves in ELTIF-eligible assets as well as in simple, transparent and standardised securitisations and certain green bonds. Also, the percentage of an ELTIF's capital that must be invested in eligible assets was reduced to 55% (from 70%) and the minimum investment ticket has been removed.
The RTS that have been published have had a chequered history with ESMA’s drafts of them being rejected by the Commission which instead opted for its own amendments. The reason for the drafts was the differing policy approaches adopted by both institutions, with the Commission keen to ensure the success of the ELTIF 2.0 regime whilst ESMA opted for a more cautious approach preferring a more proportionate approach taking into account the variety of potential ELTIFs and their investment strategies.
The starting point for the ‘ping-pong’ between the institutions was on 19 December 2023 when ESMA submitted the draft RTS to the Commission. Based on ESMA’s draft RTS, on 6 March 2024 the Commission adopted the RTS “with amendments” citing multiple legal problems with the draft RTS and requested ESMA to resubmit the draft RTS within 6 weeks in line with the adoption procedure set out in Article 10(1) of ESMA Regulation. Upon receiving an amended draft from ESMA, in line with the procedure under Article 10(1) of ESMA Regulation, the Commission adopted on 19 July 2024 the RTS with the amendments it considered relevant and submitted the delegated act to the Parliament and to the Council for scrutiny. The scrutiny period ended on 21 October 2024. A briefing note from ECON describes the differences between the institutions further.
The RTS in the Delegated Regulation relate to Regulations 9(3), 18(6), 19(5), 21(3) and 25(3) of ELTIF Regulation (as amended by ELTIF 2.0), and are accompanied by Annex I and Annex II.
In essence they deal with:
Derivatives use limited to hedging the risks inherent to ELTIF’s investments
Article 1 of the Delegated Regulation sets out the circumstances in which the use of financial derivative instruments for hedging purposes is considered as solely serving the purpose of hedging the risks inherent to the investments of the ELTIF. All of the conditions in Article 1 need to be satisfied including that the financial derivative should be economically appropriate for the ELTIF, consistent with the risk-profile of the ELTIF and aimed at a verifiable reduction of risks for the ELTIF. In addition, the underlying assets of the financial derivative must be assets to which the ELTIF is exposed, or where not available, of the same or economically similar asset class.
Life of ELTIF consistent with individual assets of the ELTIF
Article 2 of the Delegated Regulation sets out the circumstances in which the life of an ELTIF is to be considered compatible with the life-cycles of each of its individual assets. All the items listed in Article 2 need to be considered by the manager of an ELTIF and this includes the liquidity profile of each of the individual assets of the ELTIF and the timing of the acquisition and the disposal of each of the individual assets of the ELTIF, assessed against the background of the economic life-cycle of the assets, and the life of the ELTIF.
Minimum holding period
Article 3 of the Delegated Regulation sets out the criteria to be used by the ELTIF managers to determine the minimum holding period referred to in Article 18(2), first subparagraph, point (a), of the ELTIF Regulation (as amended by ELTIF 2.0). This includes the investor base of the ELTIF and where the ELTIF is marketed to retail investors, the expected aggregate concentration of retail investors.
Minimum information
Article 4 of the Delegated Regulation lists the minimum information to be provided by the manager of an ELTIF to the competent authority of the ELTIF under Article 18(2), first subparagraph, point (b), of the ELTIF Regulation (as amended by ELTIF 2.0). Such information includes the redemption policy of the ELTIF, a description of the procedures, if any, to prevent redemptions causing dilution effects for investors and the liquidity offered to investors of the ELTIF, and the liquidity profiles of the investments of the ELTIF, both under normal and stressed conditions.
Throughout the life of the ELTIF, before changing certain of the elements referred to in Article 4 the manager of the ELTIF shall notify the Member State competent authority of the ELTIF of such change in writing at least 1 month before such change, or immediately after an unforeseeable change beyond the control of the manager of the ELTIF has occurred.
Redemption policy
Article 5 of the Delegated Regulation sets out the requirements to be fulfilled by the ELTIF in relation to its redemption policy and liquidity management tools, as referred to in Article 18(2), first subparagraph, points (b) and (c), of the ELTIF Regulation (as amended by ELTIF 2.0).
Throughout the life of the ELTIF, the redemption policy shall be sound, well documented, and consistent with the ELTIF’s investment strategy and liquidity profile. Where redemptions take place more frequently than on a quarterly basis, the manager of the ELTIF shall justify to the competent authority of the ELTIF the appropriateness of the redemption frequency and its compatibility with the individual features of the ELTIF.
Maximum size of redemptions
Article 5(5) of the Delegated Regulation sets out the maximum percentage of liquid assets that can be used for redemption requests, as referred to in Article 18(2), first subparagraph, point (d), of the ELTIF Regulation (as amended by ELTIF 2.0), which shall be calibrated by the manager of the ELTIF on the basis of either the redemption frequency and the notice period of the ELTIF in line with Annex I to the Commission Delegated Regulation, or on the basis of the redemption frequency and the minimum percentage of the liquid assets of the ELTIF, as specified in Annex II to the Commission Delegated Regulation.
Liquidity Management Tools
Article 6 of the Delegated Regulation provides for the criteria to determine the percentage of liquid assets of the ELTIF referred to in Article 18(2), first subparagraph, point (d), of the ELTIF Regulation (as amended by ELTIF 2.0), which could be used to meet redemption requests. The elements include the life-cycle of the assets of the ELTIF, the life of the ELTIF, the overall stability of the investment strategy of the ELTIF throughout its life and the potential market events that may affect the ELTIF. It also includes potential market circumstances and conditions that would affect the ELTIF when the percentage is set, and the extent to which the units or shares of the ELTIF can be redeemed in such market circumstances and conditions
Matching of transfer requests
Article 7 of the Commission Delegated Regulation sets out the minimum content requirements to the full or partial matching of transfer requests of units or shares of the ELTIF by exiting and new investors where an ELTIF provides for that possibility under Article 19(2a) of the ELTIF Regulation (as amended by ELTIF 2.0). Such content requirements include format, process, and the timing of the matching and any safeguards to avoid any potential arbitrage against investors’ interest due to the asymmetry of information inherent to the matching of transfer requests.
The rules and procedures for matching requests shall be sound, appropriate for the ELTIF and its investors, and shall aim at preventing, managing, and monitoring conflicts of interest.
Cost transparency
Article 8 of the Delegated Regulation sets out the requirements for the determination of the execution price and the pro-ratio conditions where transfers are matched as referred to in Article 19(2a) of the ELTIF Regulation (as amended by ELTIF 2.0), as well as the level of the fees, costs and charges, if any, related to the transfers of units or shares of the ELTIF
Article 9 of the Delegated Regulation sets out the minimum information that ELTIFs need to disclose to investors when transfers are matched as referred to in Article 19(2a) of the ELTIF Regulation (as amended by ELTIF 2.0).
New ELTIF applications must now fully comply not only with the provisions of ELTIF Regulation (as amended by ELTIF 2.0), but also with those of the Delegated Regulation.
With respect to Luxembourg-based ELTIFs, the CSSF has also issued a communiqué whereby:
We will shortly be issuing a podcast in our Let’s talk asset management series which will touch base on the ELTIF product.
Please reach out to Claire Guilbert should you have any questions on ELTIFs.
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