Europe’s new retail vision comes under scrutiny

Proposed changes to the European Long-Term Investment Fund could lead to what some view as an unwelcome intrusion of public markets.

Is a new European regime for attracting retail investors to private markets really what it’s cracked up to be? This is a topic of conversation that Private Debt Investor has become aware of, as the market digests proposals to create a supposedly new and improved version of the European Long-Term Investment Fund.

In October last year, this column drew attention to the proposed changes, which are still only at the political rather than implementation stage and subject to revision. We anticipated that the market would welcome the changes, since adoption of the ELTIF by fund managers has been slow since it was launched in 2015 and hence such funds have played only a bit-part role in the “democratisation” of private markets. ELTIF 2.0 aims to widen the investor universe, so what’s not to like?

In fact, it turns out some market sources do have fundamental reservations – perhaps the most significant of which relates to what were described at the time as “less restrictive rules on how much of a fund should be in the form of ELTIF-eligible assets”. What this means in practice is that, under the new regime, as much as 45 percent of an ELTIF could be invested in public equities vehicles such as UCITS. Indeed, when you add in more flexible rules around small-cap investment, some believe it could increase public company exposure in an ELTIF fund to more than 50 percent.

The pressure to create a more flexible regime is understandable given the point made at the outset. Uptake of ELTIF 1.0 was painfully slow and limited to a relatively small number of private managers. Why not then open it up to a wider fund manager universe – including essentially public market managers keen to move into private markets? Such managers may very well have suffered disappointing performance in recent times and are keen to develop new product offerings potentially charging higher fees than they are accustomed to receiving.

The sceptics say this could potentially undermine what were thought, under the 1.0 regime, to be strong investor protections. If these funds are labelled “private”, then private is exactly what investors will be expecting. Without wishing to sound patronising, you wouldn’t expect retail investors to have the same level of understanding of what they’re investing into as institutional investors have. Problems could arise around misconception – as well as the possibility that investors might be forking out private market fees for a product with a large chunk of public market exposure.

There are also concerns around whether managers with a background in passive management might be able to achieve the type of returns anticipated in a field up to now dominated by active managers. Before ELTIF 2.0 moves from the debating chamber to legislation, it’s clear that there are some questions to be answered.

Write to the author at