ELTIF 2.0: Structuring and Distribution

What ELTIF 2.0 changed

ELTIF 2.0 is the reform of the European Long-Term Investment Fund Regulation, Regulation (EU) 2015/760, by Regulation (EU) 2023/606. It has applied since 10 January 2024 (Article 2 of Regulation (EU) 2023/606).

The original ELTIF framework attracted little interest because its portfolio rules were narrow and its retail distribution rules restrictive. ELTIF 2 broadened the range of eligible assets, lowered the minimum share of eligible investments, relaxed borrowing limits, allowed fund-of-funds and co-investment structures, facilitated redemptions and removed the retail investment thresholds. As a result, the ELTIF has become a realistic product for private markets managers seeking access to wealthy private clients and the broader retail market in Germany and across the EU.

An ELTIF is an EU AIF authorised under the ELTIF Regulation and managed by an authorised EU AIF manager. In Germany, AIF capital management companies managing ELTIFs are subject to the ELTIF Regulation and, where the Regulation does not provide otherwise, the KAGB (§ 338a KAGB). Authorised ELTIFs can be marketed throughout the EU to professional and retail investors using a product passport, which makes ELTIF 2 attractive for German managers building pan-European distribution and for foreign managers targeting German private banks and wealth managers.

Portfolio rules under ELTIF 2

An ELTIF must invest at least 55 per cent of its capital in eligible investment assets (Article 13(1)), down from 70 per cent under the original regulation. Eligible assets include equity and quasi-equity instruments and debt instruments of qualifying portfolio undertakings, loans to such undertakings with a maturity not exceeding the life of the ELTIF, units of other ELTIFs, EuVECAs, EuSEFs, UCITS and EU AIFs that themselves invest in eligible investments, real assets, and certain simple, transparent and standardised securitisations (Article 10). The minimum value of EUR 10 million for individual real assets was removed, and minority co-investments became possible.

Diversification limits remain. An ELTIF may invest no more than 20 per cent of its capital in instruments issued by, or loans granted to, any single qualifying portfolio undertaking, 20 per cent in a single real asset and 20 per cent in units of any single collective investment undertaking (Article 13(2)). These limits do not apply to ELTIFs marketed solely to professional investors, which gives institutional ELTIFs considerable flexibility. The diversification rules apply only after a ramp-up period set out in the fund rules.

Borrowing, redemptions and secondary transfers

An ELTIF may borrow cash of up to 50 per cent of its net asset value if it can be marketed to retail investors, and up to 100 per cent if it is marketed solely to professional investors, provided that the borrowing serves to make investments or provide liquidity, is in the same currency as the assets or hedged, and meets the other conditions of Article 16. This leaves room for subscription lines and asset-level financing; our insight on fund finance and NAV loans discusses the documentation.

The default rule is that investors cannot redeem before the end of the ELTIF's life (Article 18(1)).

The fund rules may, however, allow redemptions during the life of the ELTIF after a minimum holding period, if the manager can show that the redemption policy is compatible with the fund's liquidity profile and the assets are sufficiently liquid, with redemptions limited to a proportion of liquid assets. Regulatory technical standards specify these conditions. ELTIF 2 also allows matching of transfer requests from exiting investors with subscriptions from new investors and confirms that fund rules may not prevent investors from transferring units to third parties. Semi-liquid "evergreen" ELTIFs have become a common structure in the wealth management market as a result.

Retail distribution of ELTIF 2 products in Germany

ELTIF 2 made retail distribution simpler. Units may be marketed to a retail investor only after a suitability assessment under MiFID II and a suitability statement have been provided, irrespective of whether the investor buys from a distributor, from the manager or on the secondary market (Article 30(1)). Where the assessment is not provided in the context of investment advice and the ELTIF is not suitable, the investor's express consent is required if it wishes to proceed. The former requirements of a minimum investment of EUR 10,000 and a maximum of 10 per cent of the financial instrument portfolio for investors with portfolios below EUR 500,000 were removed.

In Germany, distribution typically runs through banks, savings banks, private banks and fund platforms and through financial investment intermediaries. A key information document under the PRIIPs Regulation is required for retail investors, and the ELTIF prospectus must contain the information specified by the Regulation. Managers must also observe German marketing rules for AIFs, including notification procedures with BaFin for EU AIFs marketed in Germany under the KAGB together with the ELTIF Regulation's marketing passport.

Distribution agreements should allocate responsibility for target market assessments, suitability, cost disclosures and complaints, and should regulate how the distributor receives information on valuation, liquidity and any suspension of redemptions so that it can inform its clients promptly.

Structuring choices for ELTIF 2 funds

Most German managers launching an ELTIF choose between a domestic structure, usually a closed-ended investment limited partnership (Investmentkommanditgesellschaft) or an investment stock corporation managed by their own KVG, and a Luxembourg structure managed by a group or third-party AIFM. The decision depends on the target investors, the depositary and administration set-up, the tax profile of the investors and where the manager already has licensed infrastructure. ELTIF 2 also permits master-feeder structures, which can combine a professional-only master with retail feeders.

The manager must ensure that fund documents address the ELTIF's life, the ramp-up period for portfolio limits, the treatment of conflicts of interest in co-investments with other group vehicles, valuation, liquidity management and the wind-down process. ELTIF 2 requires the manager to inform the competent authority of the orderly disposal of assets after the end of the fund's life. Sustainability disclosures under the SFDR apply as for other AIFs; see our insight on SFDR disclosure for fund managers.

Governance, conflicts of interest and operations

The broader investment universe brings conflicts of interest into focus. An ELTIF may co-invest alongside other funds and vehicles of the same manager or group, and its rules may permit investments in assets in which the manager or its affiliates already have an interest, but only with arrangements designed to identify, prevent, manage and monitor conflicts and with adequate disclosure. Managers should document allocation policies for deals shared between the ELTIF and institutional vehicles, the terms on which co-investment vehicles of staff participate, and how the ELTIF exits alongside other group funds.

Operationally, the fund needs a depositary, valuation procedures appropriate to illiquid assets and, for semi-liquid structures, dealing processes that match the redemption frequency promised to investors. Valuation is the critical link: where investors can redeem or transfer units during the fund's life, the net asset value on which those transactions are based must be reliable and timely, and valuation policies must deal with stale prices, lagged fund-of-funds valuations and the effect of new subscriptions. The depositary agreement, administration agreement and valuation policy should be aligned before launch, because BaFin and other competent authorities review them as part of the authorisation of the fund.

Finally, product governance obligations apply at both ends of the chain. The manager defines the target market and the distribution strategy, and distributors must check that their clients fall within it, monitor sales and feed information back to the manager. For semi-liquid funds sold in large numbers through platforms, this monitoring is the main defence against later mis-selling complaints.

Tax considerations for German investors

For German tax purposes, ELTIFs are generally treated as investment funds or special investment funds under the Investment Tax Act (Investmentsteuergesetz), depending on their legal form, investor base and investment rules.

Private investors are typically taxed on distributions, advance lump sums and gains on disposal, with partial exemptions where the fund qualifies as an equity, mixed or real estate fund. A fund in partnership form that does not qualify as an investment fund may be transparent for tax purposes, which leads to very different reporting and taxation. Because the details depend on the structure, managers should obtain tax structuring advice before choosing the vehicle and should make the tax profile clear in investor documents. Our corporate and transaction tax team works on these questions with our funds lawyers.

Transitional rules and outlook

ELTIFs authorised under the original regulation before 10 January 2024 are deemed to comply with the amended rules until 11 January 2029; those that do not raise additional capital are deemed to comply indefinitely, and older ELTIFs may opt in to the new rules by notifying their competent authority (Article 2 of Regulation (EU) 2023/606).

Managers of legacy ELTIFs should decide, in consultation with investors where the fund rules require it, whether to opt in, particularly if they want to use the more flexible redemption, borrowing and fund-of-funds rules for new capital raising. The German Fund Risk Limitation Act implementing AIFMD II also affects ELTIF managers through the general KAGB rules; see our insight on AIFMD II and the German fund reform.

How TRW & Co helps

We advise asset managers, KVGs, distributors and institutional investors on ELTIF 2 structuring and distribution in Germany. We structure ELTIFs and feeder vehicles, draft fund rules, prospectuses and key information documents, design redemption and matching mechanisms, and handle BaFin authorisation and marketing notifications. For distributors we review target market, suitability and cost disclosure processes and negotiate distribution agreements. We also advise on fund-level financing and on the interaction with the KAGB, the SFDR and German investment tax law. This page is general information, not legal advice. To discuss a fund, please contact us.