EU carving PE a path to retail investors

Retail investors will be able to make commitments to AIFMD-authorized funds using an investment structure proposed by the European Commission.

The European Commission is in the process of creating a long-term investment fund structure that would provide EU private equity firms access to retail investors.

The European Long-Term Investment Fund (ELTIF) is a vehicle designed to accept commitments from both professional and retail investors, and will be available for GPs who become authorized under the Alternative Investment Fund Managers Directive (AIFMD).

Currently the Commission has not set a time table for the implementation of the ELTIF structure; however legal sources said it was unlikely to be implemented before year end.

The proposed ELTIF structure will be available to investors globally and largely mirrors the EU’s UCITS structure for liquid financial assets.

“”The Commission's main concern is to extend to mid-tier pension funds, insurers, charities and foundations the ability to invest readily in long-term capital opportunities. And at the same time, it recognises that the ELTIF could well fulfil a useful role in the retail market, say, for individuals planning to satisfy a future liability,” said William Yonge, partner in Morgan Lewis' private investment funds group.

Marketing and investment restrictions included in the proposal may weaken the fund’s appeal to private equity professionals. Under the current proposal, ELTIFs are prohibited from marketing to retail investors if structured as a limited partnership, the most common legal structure used in private equity.

ELTIFs are also not permitted to be structured as funds of funds and there is a cap on investing in unlisted companies. The structure permits only 70 percent of the capital raised for the ELTIF to be invested in unlisted companies or real assets. The remaining 30 percent must be devoted to other assets.

It is understood that the European Private Equity and Venture Capital Association is lobbying against some of these restrictions. The EU trade body did not immediately return a request for comment.

Furthermore, soliciting capital from retail investors requires further disclosures to be made by the GP. The fund will have to publish a prospectus that complies with the EU’s disclosure regulation for retail investors, the prospectus directive, and publish a key information document.

Details around what information will be required in the disclosure documents is currently unknown as the EU will be issuing a new regulation updating key information documents, PE Manager has learned.

“There will be a shorter, snappier document requirement to be published by an ELTIF when it is promoted to retail investors. The idea is to provide greater transparency, greater disclosure and make it a bit easier and shorter to read,” said one source close to the Commission’s thinking.

However, despite these restrictions the private equity industry has been relatively buoyant about the prospect of accessing a deeper pool of investors, according to market sources.

“It’s not surprising that people haven’t been asking more questions [about ELTIFs], people tend to wait until something is finalized; but that will change when the details are decided,” said a UK-based regulatory lawyer.