It is no secret that EU citizens are not as good as their US counterparts when it comes to investing their savings in capital markets. The European Commission, aware of this problem, is currently preparing a Retail Investment Strategy.
Martin Bresson is the Director Public Affairs at Invest Europe.
The new proposal, which is expected to be published in May, has led to much heated debate between public and private stakeholders – not least on the role and possible ban of inducements.
As an asset class, private equity has long been isolated from these debates. Historically, closed-end funds set up by venture, growth or buyout structures were offered primarily to institutional investors, if only because of the natural liquidity constraints of an active ownership model.
But this is starting to change. In recent years, more and more managers have begun to consider solutions to offer their products to non-institutional but still sophisticated investors, such as high-net-worth individuals. This “democratisation” meant that managers faced new hurdles. Some of these barriers were business constraints. Others were regulatory, as marketing to non-professional customers is subject to stricter rules in every jurisdiction, and in some cases banned outright.
Enter the European Long Term Investment Fund (ELTIF). The revised ELTIF framework, which came into force this month, significantly improves the retail passport that allows AIFMD-authorised managers to market their funds to non-professional clients.
The updated passport, with a wider range of eligible investments and a larger pool of eligible investors, will be fully applicable from January 2023. This new and improved ELTIF has been seen by the long-term funds industry as one of the key missing pieces in the puzzle of cross-border fundraising in the EU. Indeed, it is the only way for any non-venture manager to market to non-professional clients not domiciled in the same country as the manager.
While some of the rules still need to be fine-tuned – the liquidity provisions to which ELTIFs will be subject still need to be drafted by ESMA – with the ELTIF the European Commission has put all the cards in the industry’s hands to make the ELTIF a success story.
However, the full extent of the success of this passport will ultimately depend on the shape of the EU Retail Investment Strategy. ELTIFs are unlikely to be marketed to retail clients, and it will ultimately be up to MiFID-regulated investment firms to distribute these products to clients. It is therefore important that EU lawmakers get this review right. A better classification of investors based on their actual needs as well as a recognition of the crucial role played by intermediated structures should be key elements guiding legislators in the upcoming negotiations.
Industries such as private equity will continue to develop solutions that allow retail investors the opportunity to commit their capital to valuable long-term projects – it is now up to regulators to create the right conditions for them to operate across the EU borders.
