Understanding… European Long Term Investment Funds
A new initiative to help channel cash from private investors to companies and projects that need to be able to rely on long-term financing is set to go live in May. European Long Term Investment Funds (ELTIF) are one of the first tangible expressions of the Capital Markets Union. Here, DG FISMA asset management unit policy analyst James Hopegood explains what they are, how they work and how they will help boost Europe's real economy.
Matching investors with businesses
The problems Europe's businesses have in attracting finance are well-known. The difficulties they encounter getting finance that they can rely on for the long term are less well known but just as important. Too often investors' desire to get their money back at short notice conflicts with businesses' need to be able to rely on money being committed to them for a long time.
The new ELTIF Regulation aims to solve this problem. It sets up a new investment fund framework that puts investors willing to tie up their money for a number of years in touch with businesses that need financing to be in place for the long term. This new fund framework shares the aims and ambitions of the 'Juncker' Strategic Investment Plan and will operate in tandem with it.
ELTIF funds will invest in long-term companies, projects such as infrastructure and intellectual property and small and medium-sized businesses. Their managers will have to explain clearly how long the money is needed for. Then, once investors commit their money, they will not be able to get it back until the ELTIF's life ends, possibly 10 or even 20 years in the future. In return for tying up their money, investors can expect a long-term, steady stream of income from the underlying projects and companies.
Money invested in an ELTIF has to be spread between a number of different projects and companies. This reduces the risk to investors as they are not depending on just one or two companies being successful to get a return on their money.
This makes ELTIF highly attractive to investors such as insurance companies, pension funds and municipalities which have to be able to pay long-term commitments such as retirement incomes. ELTIF managers who want to can offer investors the chance to get their money back early but they cannot do this if it means taking money back from companies earlier than originally promised. Retail investors can also invest in ELTIF, but there have to be extra safeguards in place to ensure they do not tie up more money than they can afford to.
ELTIF funds can only be run by managers authorised under the Alternative Investment Fund Managers Directive. ELTIF managers have to be domiciled in the EU and they must be specialists in managing the long- term and hard-to-sell assets that these funds are designed to invest in.
With the legislative work now complete, the Commission has been meeting with managers interested in setting up ELTIF funds and investors interested in putting money into them. Early results are encouraging and there is also interest from investors from outside the EU, for example, in Asia.
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