A regular briefing for the alternative asset management industry.
Last week's announcement that Vanguard is stepping up its partnership with HarbourVest to offer private equity products to more wealthy individuals is no surprise. Private funds managers are increasingly looking to access retail capital, especially the high net worth investors who may feel they are missing out on the returns offered by illiquid strategies. Of course, as we laid out in a paper last year, there are already structures available for that in Europe – but these do not always fit the bill. Policymakers, seeing long-term investment as a public good, are keen to re-double their efforts to establish an alternative structure that is appealing to – and appropriate for – retail investors, while making economic sense for the fund managers that want to tap this important source of capital.
The European Commission had high hopes for its new long-term private fund structure when it launched in 2015. The Commission (while admitting that it was hard to predict uptake) drew on experience in open-ended retail funds to argue that "a well-defined and understood brand can evolve into a globally dominant model". Tapping retail capital for long term investments could have significant social benefits, the Commission said, including for housing, health infrastructure and growth companies. But the European Long-Term Investment Fund, or ELTIF, has not yet fulfilled these lofty ambitions: when it announced a review last September, the Commission said there were only 27 ELTIFs with less than €2 billion of assets under management. The Commission now hopes that easing some of the more restrictive features of the rules will transform the fortunes of this well-intentioned regime. (The ELTIF review is part of a wider EU assessment of how its financial markets serve retail investors, on which it is presently consulting.)
Ironically, the review comes just as the ELTIF is starting to gain significant traction in the market. Many alternative asset managers are looking hard at the structure: in April, Blackrock closed its Private Equity Opportunities ELTIF with €509 million in commitments, and Neuberger Berman launched a private equity ELTIF last week. We are currently working on several ELTIF mandates and expect to see more products using the structure in the coming months.
There are certainly some restrictions in the ELTIF regime which could benefit from liberalisation – in particular, allowing an ELTIF to invest in a wider range of other funds, which would facilitate a fund of funds ELTIF; relaxing the rules on early redemptions, which are only allowed in limited circumstances at the moment; and reducing the minimum ticket size for an investor, which is now €10,000 across one or more ELTIFs.
However, whilst the consultation is welcome and the resulting reforms – expected to be announced later this year – could give the structure a boost, many managers are not waiting for its conclusions: helpful clarifications by regulators have already eased some manager concerns, particularly for those intending to invest a good proportion of ELTIF capital outside the EU. The ELTIF's pan-EU passport to market to (relatively) wealthy individuals – those with an investment portfolio of over €100,000 – offers a significant immediate opportunity, even if it does inevitably come with some steeper compliance requirements and investor protections.
Meanwhile, the UK, preferring not to tinker with the ELTIF that it inherited from the EU, is working on a new structure of its own – the Long-Term Asset Fund, or LTAF. Largely the brainchild of the Investment Association, the LTAF is currently positioned as an open-ended structure.
The UK regulator, the FCA, published a consultation paper earlier this month seeking industry views on the proposal – although time is short because the government's stated ambition is to see the first LTAF launched this year. Industry input will be critical: as the EU's ELTIF experience shows, unless the structure clearly meets investor and manager needs, it will be spurned in favour of other alternatives – and the UK has keen competitors in Luxembourg and Ireland.
...Industry input will be critical: as the EU's ELTIF experience shows, unless the structure clearly meets investor and manager needs, it will be spurned in favour of other alternatives – and the UK has keen competitors in Luxembourg and Ireland.....