guidelines The European long-term investment fund (ELTIF)

Transcription

1 guidelines The European long-term investment fund (ELTIF)

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3 foreword The European long-term investment fund (ELTIF) is a pan-european regime for Alternative Investment Funds (AIF) which channel the capital they raise towards European long-term investments in the real economy, in line with the European Union (EU) objective of smart, sustainable and inclusive growth. The ELTIF represents a milestone in the development of the cross-border European long-term funds business. This publication has been prepared by the Association of the Luxembourg Fund Industry (ALFI) in order to provide general information on the ELTIF, and ELTIF structures in Luxembourg. The Luxembourg legal framework is diverse and flexible enough to fulfil the needs of a wide range of ELTIFs, their managers and investors.

4 ELTIF what is it? Financial Vehicle corresponding to the Europe 2020 Strategy Contribution to the implementation of the political objective: high level of employment and smart, sustainable growth. Priority according to EU Commission Green Paper Institutional Investors Institutional and Retail Investors Retail investors with a portfolio of up to EUR 500,000 shall not invest an aggregate amount exceeding 10% of their portfolio in ELTIFs. Initial amount not less than EUR Written alert for ELTIF whose lifecycle exceeds 10 years: may not be suitable for retail investors. Regulated Fund Vehicle, which provides with long-term und stable returns and pursues a long-term investment strategy. 70% of the capital shall be invested in more or less clearly-defined long-term assets. Regulated Fund Vehicle Long-term Investment of 70% of the Capital ELTIF European Long Term Investment Funds First-time EU Passport for the pan-european Retail-Distribution Various Asset Classes Various Asset Classes (Private Equity, Infrastructure, specific Real Estate), as well as listed SMEs, participations, debt instruments, other ELTIF, EuVECA or EuSEF, risk diversification rules. EU AIF (with EU-AIFM) has Retail-Distribution Passport. 2

5 executive summary The ELTIF Regulation lays down minimum requirements which must be met by long-term funds in order to be authorised as an ELTIF or European long-term investment fund. ELTIF must, inter alia, be managed by authorised Alternative Investment Fund Managers (AIFM) and meet minimum eligible asset and diversification requirements. Authorised ELTIF will be permitted to: Use the designations ELTIF and European long-term investment fund ; Raise capital from institutional and retail investors across the Member States of the European Union (EU) and other European Economic Area (EEA). ELTIF may invest in long-term assets such as small and medium-sized businesses and the development and operation of infrastructure, public buildings, social infrastructure, transport, sustainable energy and communications infrastructure. ELTIF How could an ELTIF look like? Nursing homes, schools, hospitals, prisons, social housings, investments in commercial or residential real estate only in restricted form. Investments in other ELTIFs, EuVECAs, EuSEFs, but partial cascade prohibition Investments in several infrastructure funds. Investments in equity or equity-related instruments of SMEs. Real Estate Funds Umbrella Funds Debt Funds ELTIF Private Equity Funds Credits- Investment in debt instruments e.g. SMEs. Real Assets Infrastructure Funds Investments in ships, planes, facilities, machines. Ports, streets, pipelines, renewable energies, power stations, waste disposal infrastructures, communication networks etc. 3

6 what does the ELTIF mean for managers and investors? ELTIFs will channel investment into development of European and international small and medium-sized businesses (SMEs), infrastructure and certain types of real estate for the mutual benefit of European citizens, investors and managers; Investors: ELTIF will meet demand from: - Institutional (including small and medium sized) investors for a long-term fund regime - High net worth and retail investors seeking exposure to e.g. long-term, typically illiquid, assets and the protection of a dedicated regime; Managers: The ELTIF enables the managers of private equity, infrastructure and real estate funds to offer well-regulated European products meeting demand from investors and contributing to the European economy; Cross-border funds: The ELTIF facilitates the development the European cross-border long-term funds which: - Make investments in multiple countries - Are distributed to investors on a cross-border basis - Are eligible to retail investors; Public private partnerships: The ELTIF creates a harmonised EU regime for public private partnership (PPP) investments into SMEs and infrastructure; ELTIF designation: The designations ELTIF and European long-term investment fund is expected to be recognized by institutional, professional investors and retail investors keen to make long-term investments via the ELTIF, both in Europe and (subject to certain conditions) globally; Luxembourg role: The ELTIF strengthens the position of Luxembourg as a leading European centre for long-term funds and as an international hub for cross-border fund distribution. 4

7 introducing the ELTIF ELTIF and their managers are subject to requirements, inter alia, on: Authorisation as ELTIF, and approval of ELTIF managers; Investment rules: eligible assets and permitted activities, portfolio diversification rules, and prohibited activities; Lifetime, redemptions and secondary market; Distribution of proceeds and disposal of assets; Transparency, including prospectus; Marketing to professional and retail investors. The requirements applicable to ELTIFs are laid down in the ELTIF Regulation 1 which is, from 9 December 2015, directly applicable in EU Member States without national transposition. The manager of the ELTIF must be an authorised AIFM, subject to the requirements of the AIFM Directive 2 or the national law transposing the AIFM Directive, such as the Luxembourg AIFM Law 3. Any investment vehicle that qualifies as AIF is eligible to apply for and obtain the ELTIF label. Authorisation as ELTIF, and approval of ELTIF managers An ELTIF must be authorised by the competent authority of its home Member State in accordance with the ELTIF Regulation. Only EU AIFs are eligible to apply for and to be granted authorisation as an ELTIF. An ELTIF may either be managed by an authorised AIFM or be an internally managed AIF. In the latter case, the AIF have to be authorised under the AIFM Directive as an AIFM. A compartment of an EU AIF may be authorised as an ELTIF. The application for authorisation as an ELTIF must include: The constitutive document: the fund rules or instruments of incorporation; Information on the identity of the proposed manager of the ELTIF and its current and previous fund management experience and history; Information on the identity of the depositary; A description of the information to be made available to investors, including a description of the arrangements for dealing with complaints submitted by retail investors. Authorisation as an ELTIF shall be valid for all Member States. An application for approval to manage an ELTIF must be submitted to the competent authority of the ELTIF. The application for approval must include: The written agreement with the depositary; Information on delegation arrangements regarding portfolio and risk management and administration with regard to the ELTIF; Information about the investment strategies, the risk profile and other characteristics of AIFs that the EU AIFM is authorised to manage. The candidate ELTIF and its manager will be informed within three months from the date of submission of a complete application whether authorisation as an ELTIF, including approval for the EU AIFM to manage the ELTIF, has been granted. 1 Regulation (EU) 2015/760 of 29 April 2015 on European long-term investment funds. 2 Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers. 3 The Luxembourg AIFM Law is the Law of 12 July 2013 on alternative investment fund managers. 5

8 introducing the ELTIF Investment rules Eligible assets and permitted activities The eligible assets of ELTIF are: Eligible investment assets, the ELTIF s long-term investments, which may include: - Qualifying portfolio undertakings, which are mainly unlisted companies - Real assets - Units or other ELTIFs, European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEFs) - SMEs Assets which are eligible assets for Undertakings for Collective Investment in Transferable Securities (UCITS), which may include, inter alia: - Equities - Bonds - Money market instruments - Units of other UCITS Member State of the manager of the ELTIF and with every other Member State in which the units or shares of the ELTIF are intended to be marketed 6. ELTIF exposures to qualifying portfolio undertakings may include: Equity or quasi-equity instruments 7 issued by a qualifying portfolio undertaking; Debt instruments issued by a qualifying portfolio undertaking; Loans granted by the ELTIF to a qualifying portfolio undertaking. ELTIF exposures to real assets 8 may include direct holdings or indirect holdings via qualifying portfolio undertakings of individual real assets with a value of at least EUR 10 million or its equivalent at the time when the expenditure is incurred. A qualifying portfolio undertaking is a portfolio undertaking which is not a collective investment undertaking (CIU) or a financial undertaking which is either: Unlisted 4 ; Listed with a market capitalisation of no more than EUR 500 million 5. The qualifying portfolio undertaking must be either: Established in a EU Member State; Established in a third country that: - Is not a high-risk and non-cooperative jurisdiction in relation to money laundering and terrorist financing identified by the Financial Action Task Force (FATF) - Has signed an Article 26 of the OECD Model Tax Convention with the home Where the ELTIF invests in units or other ELTIFs, EuVECAs and EuSEFs, the underlying ELTIFs, EuVECAs and EuSEFs must not themselves invested more than 10 % of their capital in ELTIFs. An ELTIF may use financial derivative instruments for the purpose of hedging the risks inherent to other investments of the ELTIF, but not for speculative purposes. An ELTIF may enter into securities lending, securities borrowing, repurchase transactions, or any other agreement which has an equivalent economic effect and poses similar risks, if thereby no more than 10 % of the assets of the ELTIF are affected. 4 Not admitted to trading on a regulated market or on a multilateral trading facility (MTF). 5 Admitted to trading on a regulated market or on an MTF and at the same time has a market capitalisation of no more than EUR 500 million. 6 An agreement with the home Member State of the manager of the ELTIF and with every other Member State in which the units or shares of the ELTIF are intended to be marketed to ensure that the third country fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters, including any multilateral tax agreements. 7 Quasi-equity is defined as any type of financing instrument where the return on the instrument is linked to the profit or loss of the qualifying portfolio undertaking and where the repayment of the instrument in the event of default is not fully secured. 8 A real asset is defined as an asset that has value due to its substance and properties and may provide returns, including infrastructure and other assets that give rise to economic or social benefit, such as education, counselling, research and development, and including commercial property or housing only where they are integral to, or an ancillary element of, a long-term investment project that contributes to the Union objective of smart, sustainable and inclusive growth. 6

9 Diversification and concentration rules Borrowing rules An ELTIF must invest at least 70 % of its capital in eligible investment assets within a maximum of five years of authorisation 9. An ELTIF can invest up to: 10% of its capital in instruments issued by, or loans granted to, any single qualifying portfolio undertaking; 10% of its capital directly or indirectly in a single real asset; 10% of its capital in units of any single ELTIF, EuVECA or EuSEF; 5% of its capital in eligible assets for UCITS, where those assets have been issued by any single body. The aggregate value of units of ELTIFs, EuVECAs and EuSEFs in an ELTIF portfolio must not exceed 20 % of the value of the capital of the ELTIF. An ELTIF cannot acquire more than 25% of the units or shares of a single ELTIF, EuVECA, or EuSEF. An ELTIF may raise the 10% limit on investment in qualifying portfolio undertakings and in individual real assets to 20%, provided that the aggregate value of the assets held by the ELTIF in qualifying portfolio undertakings and in individual real assets in which it invests more than 10% of its capital does not exceed 40% of the value of the capital of the ELTIF. An ELTIF may borrow cash provided that the borrowing: Represents no more than 30 % of the value of the capital of the ELTIF; Serves the purpose of investing in eligible investment assets, except for loans to qualifying portfolio holdings, provided that the holdings in cash or cash equivalents of the ELTIF are not sufficient to make the investment concerned; Is contracted in the same currency as the assets to be acquired with the borrowed cash; Has a maturity no longer than the life of the ELTIF; and Encumbers assets that represent no more than 30 % of the value of the capital of the ELTIF. Prohibitions An ELTIF is prohibited from: Short selling of assets; Taking direct or indirect exposure to commodities; Entering into securities lending, securities borrowing, repurchase transactions, or any other agreement which has an equivalent economic effect and poses similar risks, if thereby more than 10 % of the assets of the ELTIF are affected; and Using derivatives (except for hedging purposes). 9 The 70% limit applies from the date specified in the constitutive document of the ELTIF, which must not be later than five years after the date of the authorisation as an ELTIF or half the life of the ELTIF, whichever is the earlier. In exceptional circumstances, the competent authority of the ELTIF, upon submission of a duly justified investment plan, may approve an extension of this time limit by no more than one additional year. 7

10 introducing the ELTIF Lifetime, redemptions and secondary market In general, ELTIF are closed-ended funds. Investors in an ELTIF cannot request the redemption of their units before the end of the life of the ELTIF. Redemptions to investors become possible from the day following the date of the end of the life of the ELTIF. The disclosures to investors must: Indicate the date of the end of the life of the ELTIF as well as any right to extend temporarily the life of the ELTIF and the conditions for exercising such a right; Lay down the procedures for the redemption of units and the disposal of assets; State clearly that redemptions to investors will commence on the day following the date of the end of life of the ELTIF. ELTIF or half the life of the ELTIF, whichever is the earlier; The manager of the ELTIF is able to demonstrate that an appropriate liquidity management system and effective procedures for monitoring the liquidity risk of the ELTIF are in place, which are compatible with the long-term investment strategy of the ELTIF and the proposed redemption policy; Redemptions are limited to the defined amount; The redemption policy of the ELTIF ensures that investors are treated fairly and redemptions are granted on a pro rata basis if the total redemption requests exceed the amount invested in eligible assets for UCITS. However, the manager of the ELTIF may provide for the possibility of redemptions before the end of the life of the ELTIF, provided that all of the following conditions are fulfilled: Redemptions are not granted before the date specified in the constitutive document of the ELTIF, which must not be before five years after the date of the authorisation as an The units of an ELTIF may be: Admitted to trading on a regulated market or an MTF; Freely transferred by investors to third parties other than the manager of the ELTIF. Disposal of assets and distribution of proceeds An ELTIF must adopt an itemised schedule for the orderly disposal of its assets in order to redeem investors units or shares after the end of the life of the ELTIF, and shall disclose this to the competent authority at the latest one year before the end of life of the ELTIF. An ELTIF may regularly distribute to investors the proceeds generated by the assets contained in its portfolio. Those proceeds may comprise: Proceeds that the assets are regularly producing; Capital appreciation realised after the disposal of an asset. An ELTIF may reduce its capital on a pro rata basis in the event of a disposal of an asset before the end of the life of the ELTIF, provided that such a disposal is duly considered to be in the investors interests by the manager of the ELTIF. 8

11 Transparency A prospectus must be published for each ELTIF. The prospectus must include all information necessary to enable investors to make an informed assessment regarding the investment proposed to them and, in particular, the risks attached thereto. The prospectus of the ELTIF shall contain at least the following: A statement setting out how the ELTIF s investment objectives and strategy for achieving these objectives qualify the fund as long-term in nature; Certain information to be disclosed by closed-ended UCIs in accordance with the Prospectus Directive; 10 Disclosures required under AIFMD; Indication of the categories of assets in which the ELTIF is authorised to invest; An indication of the jurisdictions in which the ELTIF is allowed to invest; and Any other information required by the competent authority. In addition, the prospectus and any other marketing documents must, inter alia: Prominently inform investors about the illiquid nature of the ELTIF; State the specific date for the end of the life of the ELTIF and any right to extend temporarily the life of the ELTIF; Inform investors about the long-term nature of the ELTIF s investments; Inform investors about the end of the life of the ELTIF as well as any option to extend the life of the ELTIF; State whether the ELTIF is intended to be marketed to retail investors; Explain the rights of investors to redeem their investment; State the frequency and the timing of any distributions of proceeds to investors during the life of the ELTIF; Advise investors that only a small proportion of their overall investment portfolio should be invested in an ELTIF. Where the units of the ELTIF are marketed to retail investors, the ELTIF will be considered as a packaged retail investment product and required to published a key information document (KID) under Regulation (EU) No 1286/2014 of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs). Marketing to professional and retail investors The manager of an ELTIF is permitted to market the units or shares of that ELTIF to professional and retail investors in its home Member State and in other Member States upon notification of its competent authority in accordance with the AIFM Directive. Marketing to retail investors Where the manager intends to market the ELTIF to retail investors, additional requirements apply. These include requirements on: Internal assessment process: the manager of the ELTIF manager is required to establish and apply a specific internal process to assess whether the ELTIF is suitable for marketing to retail investors; Information for distributors: the manager of the ELTIF must make available to any distributor all appropriate information on an ELTIF that is marketed to retail investors as well as the internal assessment process; 10 Directive 2003/71/EC and Regulation (EC) No 809/

12 introducing the ELTIF Provision of investment advice: the manager of the ELTIF or the distributor must provide the retail investors with appropriate investment advice; ELTIF manager authorisation to provide investment advice: where the manager of an ELTIF directly offers or places units of the ELTIF with retail investors, the manager must be authorised to provide the additional services of discretionary portfolio management and investment advice; Suitability test: When directly offering or placing units of an ELTIF with a retail investor, the manager of the ELTIF is required to obtain information regarding the retail investor s knowledge and experience in the investment field relevant to the ELTIF, financial situation, including that investor s ability to bear losses, and investment objectives, including that investor s time horizon. Based on the information obtained, the manager of the ELTIF may recommend the ELTIF only if it is suitable for that particular retail investor; Specific investor warning regarding a prolonged life of ELTIFs: Where the life of an ELTIF exceeds 10 years, the manager of the ELTIF or the distributor is required to issue a clear written alert that the ELTIF product may not be suitable for retail investors that are unable to sustain such a long-term and illiquid commitment; Entry thresholds test: where the financial instrument portfolio of a potential retail investor does not exceed EUR 500,000, the manager of the ELTIF or any distributor is required to ensure that the potential retail investor does not invest an aggregate amount exceeding 10 % of that investor s financial instrument portfolio in ELTIFs and that the initial minimum amount invested in one or more ELTIFs is EUR 10,000. The manager of the ELTIF or any distributor may rely on the information submitted by the potential retail investor; No preferentrial treatment rule: all investors must benefit from equal treatment; no preferential treatment or specific economic benefits may be granted to individual investors or groups of investors; Limitation of investor liability rule: the liability of the retail investor must be limited to the the original capital commitment; Withdrawal right: retail investors must be permitted to cancel their subscription and have the money returned without penalty, during the subscription period and at least two weeks after the date of their subscription to units of the ELTIF; Investor complaints: the manager of an ELTIF marketed to retail investors must establish appropriate procedures and arrangements to deal with retail investor complaints, which allow retail investors to file complaints in the official language or one of the official languages of their Member State; Local facilities: the manager of the ELTIF must ensure that facilities are available, in each Member State in which it intends to market the ELTIF, for making subscriptions, making payments to unitholders, repurchasing or redeeming units or shares and making available the information which the ELTIF and the manager of the ELTIF are required to provide; Depositary: - The depositary of an ELTIF marketed to retail investors must be an entity which is eligible to be the depositary of a UCITS. - It must not be able to discharge itself of liability in the event of a loss of financial instruments held in custody by a third party and the liability of the depositary must not be excluded or limited by agreement. - The assets held in custody by the depositary of an ELTIF must not be reused by the depositary, or by any third party to whom the custody function has been delegated, for their own account. 10

13 Marketing Notification The marketing notification to the competent authority must specify whether or not manager of an ELTIF intends to market the ELTIF to retail investors. In addition to the documentation and information required under the AIFM Directive the manager of the ELTIF must provide competent authorities with: The prospectus of the ELTIF; Where the ELTIF is marketed to retail investors: - The KID; - Information on the facilities available for making subscriptions, making payments to unitholders, repurchasing or redeeming units or shares and making available the information which the ELTIF and the manager of the ELTIF are required to provide. ELTIF Life Timeline AUTHORISATION Earliest of : - 5 years after autorisation or - Half of life time of ELTIF(17-1 2) * END OF LIFE ** LIQUIDATION / TERM INVESTMENT PERIOD HOLDING PERIOD DISVESTMENT PERIOD DIVERSIFICATION RULES Don t apply 17.1 (a) Apply Increase/decrease of capital *** Don t apply 12 months max (17.1 (c)) Don t apply 17.1 (b) ASSET ELIGIBILITY RULES Not compliant anymore (17.2) Compliance with 11 (1) 3 years max REDEMPTION OPEN-ENDED CLOSED-ENDED Not possible 17.2 (a) Possible **** 1 year Request wind-up request from investors (18.4) Not possible Possible DISPOSAL Presentation of realisation plan (21.1) 1 year * Possible extension of maximum one year with regulator approval (17.1 2) ** Defined in the documentation. Extension possible if provided for in documentation *** Doesn t cover capital calls/redemption but admission of new investors or increase of commitment by existing investors **** In accordance with documentation 11

14 about alfi The Association of the Luxembourg Fund Industry (ALFI), the representative body for the Luxembourg investment fund community, was founded in Today it represents more than Luxembourg-domiciled investment funds, asset management companies and a wide variety of service providers including depositary banks, fund administrators, transfer agents, distributors, law firms, consultants, tax advisers, auditors and accountants, specialist IT providers and communications agencies. Luxembourg is the largest fund domicile in Europe and its investment fund industry is a worldwide leader in cross-border fund distribution. Luxembourg-domiciled investment structures are distributed in more than 70 countries around the globe, with a particular focus on Europe, Asia, Latin America and the Middle East. ALFI defines its mission as to Lead industry efforts to make Luxembourg the most attractive international centre. Its main objectives are to: Help members capitalise on industry trends ALFI s many technical committees and working groups constantly review and analyse developments worldwide, as well as legal and regulatory changes in Luxembourg, the EU and beyond, to identify threats and opportunities for the Luxembourg fund industry. Foster dedication to professional standards, integrity and quality Investor trust is essential for success in collective investment services and ALFI thus does all it can to promote high professional standards, quality products and services, and integrity. Action in this area includes organising training at all levels, defining codes of conduct, transparency and good corporate governance, and supporting initiatives to combat money laundering. Promote the Luxembourg investment fund industry ALFI actively promotes the Luxembourg investment fund industry, its products and its services. It represents the sector in financial and in economic missions organised by the Luxembourg government around the world and takes an active part in meetings of the global fund industry. ALFI is an active member of the European Fund and Asset Management Association, of the European Federation for Retirement and of the International Investment Funds Association. To keep up to date with all the news from the association and the fund industry in Luxembourg, join us on LinkedIn (The Luxembourg Fund Industry Group by ALFI), Twitter (@ALFIfunds), Youtube, Vimeo or visit our website at Shape regulation An up-to-date, innovative legal and fiscal environment is critical to defend and improve Luxembourg s competitive position as a centre for the domiciliation, administration and distribution of investment funds. Strong relationships with regulatory authorities, the government and the legislative body enable ALFI to make an effective contribution to decisionmaking through relevant input for changes to the regulatory framework, implementation of European directives and regulation of new products or services. 12

15 This brochure does not constitute legal advice and is merely intended to raise issues relating to the ELTIF regulation. An ALFI working group dedicated to ELTIFs is working on Practical guidance on this topic.

16 September ALFI. All rights reserved. European long-term investment fund (ELTIF) guidelines