It's worth it.
Real asset investments. In view of persistently low interest rates and rising inflation rates worldwide, demand for real assets is increasing. European Long-Term Investment Funds, or ELTIFs, are designed to provide fee-efficient, transparent and strictly regulated access to asset classes such as infrastructure, private debt or private equity.
Sometimes a good idea takes a little longer to catch on. "Back in 2015, the European Commission conceived the European Long-Term Investment Fund (ELTIF), an EU-wide, uniformly regulated investment construct for illiquid investments," explains Markus Pimpl from the Swiss Partners Group. The idea was to kill several birds with one stone: "The EU wanted to redirect private investment into infrastructure or unlisted companies to improve the international competitiveness of the euro area, close the funding gap in areas such as renewable energy or digital infrastructure, and create an attractive alternative for investors in zero-interest Europe."
The only thing is that the approach hasn't really taken off. "The sticking point was that it is costly to design such a fund according to the specifications," explains Pimpl. Basically, it takes a very large and well-connected team of experts to analyze many potential projects and investments. But this is usually only worthwhile if demand for an ELTIF is high. Initially, however, this was not the case.
Now this is starting to change. With the conviction that interest rates on the capital markets will remain very low for a very long time to come, but that inflation rates are likely to rise at the same time, investments that offer some protection against loss of purchasing power are currently coming more to the fore. "Long-term investments - in private companies, machinery, ships, real estate or infrastructure themes such as transport, water, alternative energy supply - clearly make sense in this context," Daniel Oyen, von Plettenberg, Conradt & Cie. family office, is convinced. "The payouts of such investments are higher than those of interest-bearing securities, because these are usually difficult to sell during their term of ten to 15 years. And infrastructure investments are also often linked to the rate of price increases. That gives investors some inflation protection."
Alone, such investments are not easily accessible. Especially in the infrastructure sector, very high investment sums are often required. In the past, therefore, the route for private investors was often via closed-end funds. But these vehicles have increasingly fallen into disrepute in recent years due to economic misjudgements, cases of fraud, their often high lack of transparency and high costs. "That has hurt the whole asset class across the board, and I don't think it's going to recover to the old pre-2008 levels either," Oyen says.
The European Long-Term Investment Fund is now stepping into that breach. This is because ELTIFs are subject to very strict regulations that all issuers must adhere to and which serve to protect investors. The fees, for example, must be completely transparent. "If a customer subscribes to an ELTIF, he knows exactly what costs he will incur during the term," explains Pimpl.
Moreover, only so-called qualified alternative investment fund managers (AIFM) are eligible as issuers - dubious providers are ruled out. In addition, every ELTIF is traded on every trading day, and the current information can be called up at any time with the help of the respective international securities number (ISIN). This is not the case with closed-end funds. Furthermore, each vehicle must have a clearly defined maturity. The fund matures on this defined date. An early sale is not intended - after all, the investment is designed for the long term. Nevertheless, the issuer can allow investors to redeem the units under certain conditions.
Above all, however, there are very precise rules as to where and how much an ELTIF may invest at all. Only illiquid investments are permitted, i.e. private equity, infrastructure projects or private debt, but also patents or real estate, whereby 70 percent of the fund volume must always be invested. The share of liquid investments may only amount to a maximum of 30 percent. Funds of funds, which usually have high fees, are not allowed at all.
It is particularly important that these funds must have sufficient diversification. "In principle, a single investment may not account for more than ten percent of the fund volume," explains Timo Werner of Commerz Real, which recently entered the ELTIF market with KlimaVest. "If - which can happen in exceptional cases - individual holdings are slightly above this threshold, a single holding may not exceed 20 percent of the fund volume, and the holdings that exceed the limit may not exceed 40 percent of the fund volume in total. This is then a hard limit. In addition, each tangible asset must have a minimum volume of ten million euros."
However, since a single investment may not exceed ten percent of the portfolio, it is mandatory for an ELTIF to have a total volume of at least 100 million euros. "This means that smaller and less professional providers fall out of the market. Almost only large initiators can handle this, where investors can be very sure that they are actually competent in asset management," adds Oyen.
Especially in view of the bad experiences with the market for closed-end investments, this is important. "The quality of ELTIFs and the corresponding management should therefore also be comparatively high," he says, concluding, "Overall, ELTIFs thus offer a charming, transparent and well-regulated option for adding illiquid assets to a portfolio."
That said, investors should of course check where each ELTIF is invested. "What is exciting about this concept is that ultimately anything that is not liquid can be packed into such a fund," Markus Pimpl explains. Some funds, for example, are monothematically focused on private equity or energy production. Others mix different areas and thus have a higher degree of diversification. "This is probably the better option for investors who are investing in real assets for the first time," Daniel Oyen reflects.
The expert currently advises caution with regard to funds that grant private loans to companies to a large extent - private debt. "At the moment, it's completely unclear how many more companies could get into trouble as a result of the Corona crisis." A broadly diversified equity portfolio, Oyen adds, should yield returns that are three to four percent above the rate of inflation in perspective. Especially if a high proportion of private equity is included, however, the targeted returns can also be in the lower double digits. "However, every investor must be aware that such a return cannot be achieved without risk," adds Pimpl. For example, investments in unlisted companies do not always perform as forecast. In the worst case they can also fail completely.
Nevertheless, the addition should be worthwhile in view of the high transparency and the additional security features. A recent study by the private bank Hauck & Aufhäuser together with the Leipzig Graduate School of Management examined the effect of adding real assets to a standard portfolio of bonds, equities, precious metals and liquidity. The result: In the past, the return would generally have increased and the portfolio fluctuations would have been lower. And since investments in tangible assets are likely to become even more important in the future, the ELTIF should now gain an important place in investment strategies. ®
How to invest in ELTIF.
First, investors must be qualified to invest in an ELTIF. Only investors with more than 100000 Euro in financial assets are allowed to buy ELTIF shares. Moreover, up to a liquid capital of 500000 euros, subscription is limited to ten per cent of the financial assets. This was stipulated for investor protection reasons, so that the long-term investment does not restrict the investor's freedom of disposition and liquidity too much.
According to the European financial regulator ESMA, there are now around 50 ELTIFs authorised for sale across the EU.
One pure infrastructure ELTIF, for example, is KlimaVest (ISIN: LU21839003) from Commerz Real. Its focus is on renewable energy such as wind and solar parks. "We benefit from the fact that we already have many years of experience in managing such assets, know the market, the project developers and service providers, and can reliably assess whether an individual wind or solar park represents an attractive investment within the scope of a sound acquisition due diligence and location analysis," says Timo Werner, Commerz Real. Overall, the fund aims for a return of three to four percent per year.
With PG Private Markets (LU2232093604), Partners Group has launched a mixed ELTIF. This fund is to consist of around 50% private equity investments, 20% infrastructure projects and 20% real estate and 10% direct corporate loans, i.e. private debt. Despite this broad diversification, the product is expected to generate a low double-digit return.
The US firm BlackRock also wants to enter the market - on the one hand with a product geared to private equity (LU1916394486) and, together with Deutsche Bank, with an infrastructure ELTIF. Other providers include Muzinich, which specialises in the private lending market with its Firstlight Middle Market ELTIF (LU1946044911), and Amundi.
Author: Gerd Hübner