EU updates broaden availability of private strategies

Money managers operating in Europe will have an easier time selling private market strategies to a broader group of investors due to changes in European Union laws.

Starting in the first quarter of 2024, smaller investors will gain access to top-tier alternatives strategies via a new fund-of-funds structure within the European Long-Term Investment Funds Regulation. The changes also include a reduction in the minimum investment amount, and sources anticipate the amendments will result in managers bringing in new clients from wealth and other retail channels.

The European Parliament approved the amendments Feb. 15. Long-term investment funds were launched in 2015 to channel money into long-term infrastructure and energy projects across the Continent. The updated rules will help managers offer access to private companies needing long-term capital in the transport and energy sectors, but also channel investment into hospitals, social housing, and small- and medium-size enterprises via new, more flexible fund structures.

The funds had struggled to gain traction, but sources expect the latest changes will garner more interest. Preparation is underway at a number of firms to offer a wider selection of funds and meet investor demand for private assets, sources said.

One of the changes is a reduction in the minimum threshold for investment in these private assets ELTIFs — with sources expecting wealth managers, retail investors, charities, endowments and smaller pension funds to take advantage of private markets access at a lower level of commitment. Investors will no longer have to invest a minimum of €10 million ($11 million), with the changes removing a threshold completely.

The update to the ELTIF regulation "unshackles" the constraints that were there previously, said Richard Bruyere, Paris-based managing partner and co-founder of consultant Indefi Group, in a telephone interview.

"It's good news for managers," he said, adding that managers will have an easier time coming up with funds and marketing private market strategies than before the changes.

The original ELTIF regulation generated about 80 fund launches, with limited demand due to regulatory constraints.

Mr. Bruyere added that the changes are good for traditional managers that "want to jump on the private markets bandwagon," due to the fact that the ELTIF regulation will no longer prohibit the use of fund-of-funds structures.

"If you are a traditional European manager, you have fund selection in-house because you are used to building third-party products for banks, your own multiasset products and insurance companies," he said, noting that managers can use capabilities they already have by repurposing them through a fund-of-funds structure. Investors will be able to access a wide range of off-the-shelf capabilities readily available to construct portfolios, he added.

Indefi estimates the ELTIF market in Europe will increase to between €50 billion ($60 billion) and €70 billion over the next five years from less than €10 billion currently.

Schroders Capital launched its first ELTIF on March 1. The Schroders Capital Private Equity ELTIF focuses on lower to midmarket private equity buyout and growth co-investments in the European health-care and digital consulting sectors.

Tim Boole, head of product management at Schroders Capital in Zurich, said in a telephone interview that even though there was a demand among small institutional investors and retail clients for private asset strategies, the previous iteration of the regulation made it difficult to sell these types of funds in Europe.

"We needed a way to access investors and ELTIF regulation provides that," he said.

"Now that (the new) ELTIF rules have come out, we are looking at seeing if we can take advantage of that," he said.

For its new ELTIF launch, Schroders is looking to take advantage of the new distribution rules, which will make it easier for wealth managers to bring their clients into the funds.

"Eligibility rules were complex and caused a lot of headaches for wealth managers in terms of information you needed to have, which went well beyond what most financial products require. The new rules are more pragmatic," Mr. Boole said.

Schroders is also planning to launch a series of ELTIFs in the coming years.

"It's not going to be a single fund. It's going to be a program," Mr. Boole said.

Schroders plans to launch private equity ELTIFs for 2024 but also other ELTIFs for some of the other private markets asset classes such as infrastructure, he added. Schroders Capital has €85.6 billion in assets under management.

Amendments to ELTIF also solve an issue of launching one fund and not being able to distribute it across all European markets.

"ELTIF is the only way to distribute in a scalable way across Europe," West Lockhart, managing director and head of U.K., Europe, Middle East and Africa wealth and family office at BlackRock Alternatives Specialists, said in a telephone interview.

"We think the majority of wealth managers would like to make private markets part of a strategic asset allocation," he added.

BlackRock already runs ELTIF strategies. Mr. Lockhart said his firm has in the past launched a private equity ELTIF and one private infrastructure ELTIF, which have a combined AUM of £1 billion ($1.2 billion) between them.

On March 9, BlackRock launched two new ELTIFs — BlackRock Private Equity ELTIF and BlackRock Future Generations ELTIF.

The BlackRock Private Equity ELTIF will look to build a diversified portfolio of between 25 and 30 co-investments, spanning a two-year investment period.

The BlackRock Future Generations ELTIF will look to capture opportunities across investment themes such as good health and well-being, climate, resources, education, and financial inclusion and will invest in line with the United Nations' Sustainable Development Goals. Mr. Lockhart said that investors such as private banks, smaller pension funds and insurance companies particularly in the DACH region, which includes Germany, Austria and Switzerland, have shown interest in ELTIFs.

Private markets funds traditionally require capital calls, which can be time consuming and difficult to manage for smaller wealth managers, while the fully funded ELTIF vehicle has no need for capital calls and removes the operational complexity, he added.

"It will bring enhanced flexibility to vehicles and to managers to include a broader array of investments that they can include in the fund. Prior to that we would have invested through co-investments. We would seek to take advantage of the new changes when they come into effect," he added.

Mr. Lockhart added that the regulators also helped managers by aligning ELTIF rules with Markets in Financial Instruments Directive II rules, making it less challenging for wealth managers to advise their clients regarding ELTIF allocations.

Managers are also taking advantage of a similar development in the U.K. In 2021, the Financial Conduct Authority set out rules for a new type of fund, known as Long-Term Asset Funds, which facilitate access to long-term illiquid assets for U.K. investors including defined contribution plans.

On March 29, 2023, Schroders Capital launched the first LTAF into the U.K. market. The Schroders Capital Climate+ LTAF aims to support investors in the transition to a net-zero economy. U.K. multiemployer defined contribution plan Cushon Master Trust, London, was seed investor in the LTAF, but the investment value was not disclosed. Cushon has £1.8 billion in assets.

Aviva Investors also received approval from the FCA to launch its own LTAF for U.K. investors, a spokesman confirmed. He said further details will be provided "in due course."