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EU proposes long-term investment funds regime to boost “patient capital”

Pension funds expected to be interested in new “ELTIF” funds

The European Commission, the executive arm of the European Union, has proposed a new investment fund regime for investors who want to back unlisted companies and projects for the long term.

The new European Long-Term Investment Funds (ELTIF) framework proposal will be presented to the heads of state-level European Council meeting which starts today (June 27) – which has long-term financing on the agenda.

“There is a need to encourage investors to make longer term commitments to assets such as infrastructure projects by providing ‘patient capital’ rather than chasing short term gains,” the Commission says.

The draft text says pension funds and insurers have expressed an appetite for investing in longer-term investment assets but say there is an absence of readily available pooling mechanisms to facilitate it.

“As a result such investment opportunities are restricted to a few very large investors, such as large pension funds or insurance undertakings, able to raise and commit sufficient capital by virtue of their own resources.” This acts as a “barrier” to smaller institutions such as local pension plans, municipalities, funds for the professions or corporate pension plans.

The new funds would be available to all types of investor, professional and retail, across Europe and managers will have to comply with the Alternative Investment Fund Managers Directive (AIFMD) on investor protection and not the EU’s regular UCITS fund regime.ELTIFs would invest in illiquid assets – and investors will not be able to withdraw their cash until the specified end date of their investment, which could be 10 years or more, although the Commission expects a secondary market to emerge so that investors can trade their fund stakes.

“Pension funds and insurers are expected to be particularly interested in ELTIFs”

“In exchange for their patience, investors would benefit from the regular income stream produced by the investment asset and possibly collect an illiquidity premium,” the Commission reckons: “Pension funds and insurance companies are expected to be particularly interested in ELTIFs.”

The measure was first mooted in the Commission’s green paper on Long-Term Financing last year, and has undergone consultation since then.
At least 70% of ELTIF assets have to be long-term. They can only invest in unlisted companies, “real assets” or the new European Social Entrepreneurship Funds (EuSEF) and Venture Capital Funds which will be available from July 22.

Internal Markets Commissioner Michel Barnier said: “I hope that creating a new EU investment brand will gain the confidence of investors and companies alike.”