With European policymakers having already agreed on the broader rules for the revamped European Long Term Investment Fund 2.0 framework, ESMA is considering industry submissions to a consultation on its regulatory technical standards (RTS).
The feedback indicates ELTIF 2.0 needs more flexible investor liquidity parameters to be a success, especially in three specific areas:
1. Minimum Holding Periods
What ESMA wants: Setting fixed compulsory minimum holding periods (of three years or any other prescribed fixed period).
What industry wants: No minimum holding period. Setting these periods assumes all ELTIFs are homogenous and disregards the other liquidity management tools (LMTs) already available to ELTIF managers. A mandatory time-based minimum holding period makes ELTIFs less attractive by limiting certain investments and investors, while a fixed compulsory minimum holding would make the fund unworkable.
Our take on it: Mandating the ELTIF asset manager to design and calibrate the minimum holding period on a case-by-case basis, based on the criteria set by ESMA and supervised by national regulators, is more appropriate than a single quantitative market limit mandated by ESMA.
2. Redemption Terms
- Notice Periods
What ESMA wants: Mandatory minimum notice period of 12 months for fund redemptions.
What industry wants: Given the imposition of minimum holding periods, ELTIF managers are already being required to have robust and comprehensive LMTs. Additionally, there is ongoing review of the AIFMD framework, which mandates AIFMs must manage their liquidity without relying on a long notice period.
Our take on it: There is logic to suggest ELTIFs should be given wider discretion under the supervision of their national regulator for a shorter investor notice period when justified by a specific situation.
- Redemption Frequency
What ESMA wants: The maximum frequency of ELTIF redemptions should be quarterly.
What industry wants: Quarterly might be a reasonable basis for certain asset classes. However, a single fixed mandatory maximum redemption frequency might not be suitable for all ELTIF asset classes or accommodating for a wide spectrum of investor appetites.
Industry wants ESMA to either allow the ELTIF manager to define appropriate redemption frequency, as approved by their local regulator, or allow exceptions from the quarterly requirement, where the ELTIF manager can justify more frequent redemptions considering the specific characteristics of the fund. Industry believes the redemption frequency should not be evaluated in isolation and the ELTIF's liquidity profile and availability of LMTs may allow for more frequent redemptions in certain instances.
Our take on it: The U.K. LTAF parameters allow for a maximum redemption frequency of one month compared to a 90-day minimum notice period for ELTIFs. If one ruleset is seen as more or less restrictive than the other, that could play a role in how the respective ELTIF/LTAF markets develop.
3. Liquidity Management Tools
What ESMA wants: The selection and implementation of at least one anti-dilution tool and to allow for redemption gates “in stressed market conditions”.
What industry wants: ELTIF managers remain best placed to choose the most appropriate LMT for risk management. This applies in both normal and stressed market conditions, depending on the fund’s structure and on a case-by-case basis.
Our take on it: ELTIFs should ultimately provide asset managers with the greatest degree of flexibility to deploy LMTs when needed, to serve the best interest of its investors.
Principles Based Approach
The most critical area which will dictate the ultimate viability of ELTIF distribution success is the calibration of investor liquidity parameters. Industry generally wants the final ELTIF RTS to retain asset manager discretions to the greatest degree possible. ELTIFs by their nature are highly unlikely to be homogenous in terms of prospective investors or investment types. As such, imposing a “one size fits all” supervisory approach would greatly reduce the attractiveness of the ELTIF to all.
In summary, asset managers believe they are best placed to frame the liquidity profiles of funds based on a mix of qualitative and quantitative metrics, aligned with the common criteria laid down by ESMA and further supervised by national regulators. Whether ESMA agrees that ELTIF managers are best placed to set these investor protection parameters, or whether they would prefer to prescribe uniform standards for the market, will ultimately impact the success of ELTIF 2.0. Industry hopes that flexibility is granted to cultivate the ELTIF markets’ growth.
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