It is estimated that BDC assets under management increased from about $19 billion in the final quarter of 2009 to roughly $105 billion at the end of the first quarter of 2019 (an increase of 452%). The number of investments made by these vehicles grew from about 2,500 to almost 12,500 in the same period.
ELTIFs – The European Long-Term Investment Fund (ETIFs) is a relatively new market development within the EU that seeks to provide capital for certain private credit strategies. They are in essence a sub-set of the AIFMD regime (they need to be managed by an EU AIFM and must be an EU AIF) that caters to a private capital (particularly private credit) strategy and also allows retail marketing.
Whilst not widely adopted to date, a number of managers have raised significant amounts using the structure from EU private bank networks (in particular, in Germany, Italy and Spain). However, the restrictive nature of the investment restrictions that currently apply means that the ELTIF has not been as widely adopted to date as otherwise may have been the case.
An ELTIF may only make investments in two categories of assets (i) "eligible assets" and (ii) UCITS-eligible investments (transferable securities).
In relation to credit investments, eligible assets are debt instruments (for example, bonds, notes etc) and loans issued by / made to "qualifying portfolio undertakings". Certain types of equity, real estate and ELTIF fund investments are also eligible for these purposes. Investments in securitisations, other structured products, derivatives (other than for hedging purposes), short trades and STFs are generally not permitted.
A qualifying portfolio undertaking must generally be an operating entity with a real business outside of a financial services context (as a result investment in banks, investment firms, AIFMs, other funds and other types of financial undertaking are restricted). Generally, the portfolio company (a) cannot have securities admitted to trading on an EU trading venue (which we think would include securities that have technical listings for tax reasons) unless it has a market capitalisation of EUR 500 million or less and (b) must be established in the EU, although other non-EU companies may be eligible if certain conditions are met (mainly around that country having tax cooperation arrangements in place).
An issue we have found with these restrictions is that most private credit managers want to use a strategy that is complementary to their core approach. If they adopt a global investment approach for their existing strategies, it is unlikely that an ELTIF will be able to make co-investments in a directly comparable portfolio to the core strategy (for example, if borrowers include US or UK entities).
There is no statutory right for investors to require redemptions before the end of the life of the ELTIF; however, an ELTIF's constitutional documents may offer redemptions provided that redemptions (i) are not available before the date specified in the ELTIF's constitutional documents (which must not be later than the earlier of (a) 5 years after authorisation of the ELTIF and (b) half the life of the ELTIF (which term must be consistent with the long-term nature of the ELTIF and appropriate for the assets of the ELTIF)), (ii) the manager has a defined redemption policy and is able to demonstrate appropriate liquidity management, (iii) the rights of redemption are limited to a percentage (consistent with the liquidity management strategy) of transferable securities held by the ELTIF and (iv) investors are treated fairly.
In practice, this means that the right of redemption prior to the end of the life of the ELTIF is likely to be driven by the liquidity requirements of the ELTIF's investor base and a matter for commercial negotiation when launching the vehicle.
A review is currently being undertaken on the ELTIF restrictions which is expected to conclude in 2021. It is hoped that a number of the more onerous restrictions (including the geographical investment restrictions) will be removed or relaxed, thereby opening up the structure to a wider range of investment strategies.