On 19 July 2024, the EU Commission published the Delegated Regulation (the “Delegated Regulation”)^[1] supplementing Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (the “ELTIF-Regulation”)^[2]. The delegated Regulation specifies in particular:

1. when derivatives will be considered as being used solely for hedging the risks inherent to other investments of the ELTIF
2. the requirements for an ELTIF’s redemption policy and liquidity management tools
3. the circumstances for the matching of transfer requests of units or shares of the ELTIF
4. certain criteria for the disposal of ELTIF assets, and
5. certain elements of the cost disclosure.

In our following summary, we briefly outline the specifications in relation to these 5 topics. In short, setting-up an ELTIF, managing it and monitoring its development requires substantial preparation, detailed information and assumptions and as a result extensive documentation initially as well as ongoing.

1. Introduction

The revised regulatory framework for European long-term investment funds (ELTIF) is a part of the EU’s Capital Markets Union (CMU) initiative^[3], which aims at creating a single market for capital to facilitate investments and savings across all Member States. It is the EU’s intention to help finance the energy, social and transport infrastructure projects within the EU, promote the “green deal”^[4] and digital transitions, and the Union’s real economy at large. In the EU commission’s opinion, ELTIFs can unlock synergies of an EU Single Market and enable the creation of a deeper and more integrated CMU including retail-money. The ELTIF Regulation was amended by Regulation (EU) 2023/606 of the European Parliament and the Council. Regulation (EU) 2023/606 was adopted on 15 March 2023, published in the Official Journal on 20 April 20231 and applies since 10 January 2024.

2. Derivatives used solely for hedging

Article 9(2), point (d), of the ELTIF-Regulation prohibits ELTIF from using financial derivative instruments, except where the use of such instruments solely serves the purpose of hedging the risks inherent to other investments of the ELTIF. Only in this case may an ELTIF hedge that exposure by using a financial derivative instrument the underlyings of which belong to the same, or economically similar, asset class as the financial derivative instrument the underlyings of which correspond to the assets to which an ELTIF has or would have exposures.^[5] Consequently, an AIFM has to ensure that the use of financial derivative instruments solely serves the purpose of hedging the risks inherent to other investments of an ELTIF. The AIFM needs to be able to verify through its risk management systems that the risks identified can be mitigated using a derivative and the way in which the financial derivative does mitigate such risk.^[6] Consequently, Article 1 Delegated Regulation stipulates that the use of financial derivative instruments is only allowed where the AIFM can show that it is:

• economically appropriate for the ELTIF at the ELTIF level
• consistent with the risk-profile of the ELTIF
• aims at a verifiable reduction of the risks at the ELTIF level
• the underlyings of the financial derivative instruments are assets to which the ELTIF in question is exposed, or, where the financial derivative instruments to hedge the risks arising from the exposure to such assets are not available, and
• the underlyings of financial derivative instruments are of the same or economically similar asset class.

3. Redemption policy and liquidity management tools

a) Redemption Policy

The Delegated Regulation points out that the AIFM needs to ensure the alignment and coherence of an ELTIF’s investment strategy & objective with its liquidity profile and redemption policy. I.e., an ELTIF needs a redemption policy. According to Articles 4&5 Delegated Regulation, this policy needs to consist of the following topics:

• information on the periodicity and the duration of the redemptions, the conditions, time window, timing limitations and generally the requirements under which redemptions can be granted^[7]
• a description of the available liquidity management tools, and the conditions for their activation
• the conditions and procedures for requesting redemptions and for processing the redemption requests received
• the entities responsible for managing the redemption process and how the redemptions will be documented
• a description of how the assets and liabilities of the ELTIF will be managed to meet redemption requests
• a description of the procedures, if any, to prevent redemptions causing dilution effects for investors
• a description of the valuation procedures of the ELTIF
• the results, assumptions and inputs used for liquidity stress tests, demonstrating whether and how, in severe but plausible scenarios, the ELTIF is able to deal with redemption requests
• the liquidity offered to investors of the ELTIF, and the liquidity profiles of the investments of the ELTIF, both under normal and stressed conditions
• information about the implementation of the liquidity management tools^[8]
• the approach used by the manager of the ELTIF to determine the maximum percentage of assets available for redemption at any redemption date.

It requires the AIFM to consider:

• the life cycles of each of the individual assets
• the liquidity profile of each of the ELTIF’s individual assets
• the liquidity profile of the ELTIF’s portfolio on a weighted basis
• the timing of acquisition of those individual assets, and
• the valuation of those individual assets

when determining the redemption policy of an ELTIF in accordance with Art. 18 (2) ELTIF Regulation.^[9]

b) Liquidity management tools

The Delegated Regulation further states that the AIFM has to be able to demonstrate to the competent authority of the ELTIF that it also has in place appropriate liquidity management tools that are compatible with the long-term investment strategy of the ELTIF.^[10]

The requirement for an appropriate liquidity management system derives from Article 16(1) AIFMD which obliges AIFMs for each AIF that they manage and which is not an unleveraged closed-ended AIF, to employ an appropriate liquidity management system and adopt procedures which enable them to monitor the liquidity risk of the AIF and to ensure that the liquidity profile of the investments of the AIF complies with its underlying obligations. This liquidity management system needs to align an ELTIF’s investment strategy, liquidity profile and redemption policy. As e.g. the redemption profile is generally part of an investment fund’s pre-contractual information provided to potential investors^[11], it follows that the liquidity profile needs to be defined prior to an ELTIF being launched as part of the set-up process.

c) Minimum holding period

The Redemption Policy may, but need not, include a minimum holding period that typically should enable the AIFM to complete the investment of its capital contributions. Neither the ELTIF Regulation nor the Delegated Regulation define specific holding periods but leave it to the AIFM to define – or not - such a holding period taking into consideration the specific circumstances of each ELTIF. According to Article 3 Delegated Regulation, these circumstances shall include -amongst other indicators, some of which we already mention above-:

• the underlying asset classes of the ELTIF, their liquidity profile
• the investor base of the ELTIF and where the ELTIF is marketed to retail investors, the expected aggregate concentration of retail investors
• the information on the degree of concentration of the ownership of the professional investors in the ELTIF, where available
• the extent to which the ELTIF lends or borrows cash, grants loans, or enters into securities lending, securities borrowing, repurchase transactions, or any other agreement which has an equivalent economic effect and poses similar risks
• the average and mean length of life, where applicable, of the assets of the portfolio of the ELTIF.

In short, an AIFM needs to do and document an extensive analysis of each ELTIF’s features that have an impact on the liquidity situation of the investment fund.^[12]

According to the Delegated Regulation redemptions shall be limited to a portion of liquid assets and liquidity mismatches are to be avoided. The reasoning behind this is to ensure the effective protection of the long-term assets of the ELTIF, i.e. no “fire sales” and the resulting protection of the interests of all investors. The use of redemption restrictions to be included in an ELTIF’s documents should relate to a wide range and different types of situations, including to stressed market situations.^[13] To make things more complicated, the Delegated Regulation contains two Annexes which define minimum and maximum percentages of liquid assets that need to be owned by any ELTIF allowing redemptions and that may be used to fulfil redemption requests at any given time. For example, an ELTIF without notice period and a quarterly redemption offer may only use up to 25% of its liquid assets to fulfil redemption requests at any redemption date. An ELTIF with a 12 months’ notice period and only a yearly redemption date may use 100% of its liquid assets to fulfil redemption requests at any redemption date. For such an ELTIF it may also be sufficient to own 10% liquid assets at any given time.^[14]

In a nutshell, before setting-up an open ELTIF, the AIFM needs to determine which approach to apply and therefore how to calibrate the percentage of the assets of the ELTIF held in liquid assets, Articles 18(2) and 9(1)(b) ELTIF Regulation. Annex I and II of the Delegated Regulation provide guidance on this calibration.

The liquidity profile of an ELTIF should take into account

• the notice period, if any,
• the frequency of redemptions of the ELTIF
• anti-dilution tools, in particular levies, swing pricing and / or redemption fees^[15], and
• expected cash flows.^[16]

The expected cash flows should not be based on the possibility that the ELTIF can dispose of eligible long-term investment assets or the possibility that the ELTIF can raise capital through new subscriptions. Where the amount of liquid assets of the ELTIF falls below specified thresholds, in particular, given asset value fluctuations or the impact of redemptions, the AIMF should, within an appropriate period of time, take such measures as are necessary to reconstitute the minimum percentage of the liquid assets.^[17]

4. Matching of transfer requests of units or shares of the ELTIF

Should an AIFM for an ELTIF implement the possibility to match transfer requests between existing and / or potential investors, as referred to in Article 19(2a) of the ELTIF Regulation, it also needs to implement processes to avoid price arbitrage.^[18] The Delegated Regulation defines detailed requirements to be set by the AIFM in relation to the effective functioning of the matching of requests and the determination of transfer prices, such as frequency of matching, dealing dates, safeguards against price arbitrage, avoidance of asymmetry of information at investor-level etc.^[19] In our experience, so far AIFM try to avoid this topic and there is no obligation to offer such a possibility to the investors.

5. Criteria for the disposal of ELTIF assets

According to Article 21 ELTIF Regulation, the AIFM shall inform the competent authority of the ELTIF of the orderly disposal of its assets in order to redeem investors’ units or shares after the end of the life of the ELTIF, at the latest one year before the date of the end of the life of the ELTIF. Upon the request of the competent authority of the ELTIF, the ELTIF shall submit to the competent authority of the ELTIF an itemised schedule for the orderly disposal of its assets. This schedule shall include the following information:

• an assessment of the market for potential buyers
• an assessment and comparison of potential sales prices
• a valuation of the assets to be divested
• a time-frame for the disposal schedule.

Due to the potentially illiquid nature of the ELTIF’s assets, the Delegated Regulation requires the AIFM to assess the market for potential buyers taking into account market risks, including whether potential buyers are dependent on obtaining loans from third parties, whether there is a risk of illiquidity of the assets before sale, whether there are risks associated with political changes or legislative changes, including fiscal reforms, and whether there is a risk of deterioration of the economic situation in the market which is relevant to the ELTIF’s assets.^[20] Valuation of assets to be disposed needs to be “carried out at a point in time that is sufficiently close to the beginning of the disposal of the assets.”^[21] The outcome of this analysis needs to be presented to the competent authority.

6. Costs disclosure

To ensure a common approach in relation to the disclosure of the costs of investing into an ELTIF, Article 12 Delegated Regulation (tries to) requires the pre-contractual disclosure of costs to encompass all costs borne directly or indirectly by investors, irrespective of whether those costs are paid to the manager of the ELTIF or to a third party. Distribution costs should comprise all administrative, regulatory, professional service, and audit costs that are related to distribution.^[22] Some costs are quite easy to understand and disclose, e.g. depositary, central administration, valuation, prime-brokerage and collateral management fees, to name a few. Other costs mentioned in Article 12 Delegated Regulation are easier quite broad and / or not so easy to determine before the start of the ELTIF. These costs include e.g. “other indirect costs”, “professional service costs”, “other providers that trigger transaction costs” or “property management costs and similar costs”. While it is quite clear what the term “property management costs” refers to, “similar costs” may be quite difficult to assess “pre-subscription”. The same is true for “audit costs” in relation to transactions, this could include all types of due diligence costs, but these are difficult to quantify in advance. The same is by the way true of costs in relation to legal and tax advice, given the infinite creativity of European and national lawmakers in inventing new regulations.

We are looking forward to supporting you in your “project ELTIF”. Please do not hesitate to contact us.

Fabienne Wirtz-Moscariello	Harald Strelen, LL.M - MSc
Senior Associate	Partner
Rechtsanwältin / Lawyer*	Rechtsanwalt / Lawyer*
+352 26202332-24	+352 26202332 30 (office) +352 691 107 506 (mobile)
fabienne.wirtz@aiqunited.com	harald.strelen@aiqunited.com

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[1] Register of Commission Documents - C(2024)4991 (europa.eu)

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015R0760

[3] https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/capital-markets-union_en

[4] https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en

[5] Delegated Regulation, Preamble (1).

[6] Ibid.

[7] E.g. notice period, repayment dates, format and necessary content for redemption requests, whether cancellations of redemption requests are possible.

[8] See below.

[9] It is worth noting that Article 18(1) ELTIF-Regulation states as the general rule for ELTIF that investors in an ELTIF shall not be able to request the redemption of their units or shares before the end of the life of the ELTIF. However, in our experience and in particular in relation to ELTIF aimed (also) at retail investors, a redemption policy within the meaning of Article 18(2) ELTIF Regulation is required to consider an ELTIF as marketable.

[10] Preamble no (3) and Article 2 Delegated Regulation.

[11] We refer also to Article 23 (1)(h) AIFMD, which obliges AIFM for each of the AIFs that they market in the Union to make available to AIF investors, in accordance with the AIF rules or instruments of incorporation, a description of the AIF’s liquidity risk management, including the redemption rights both in normal and in exceptional circumstances, and the existing redemption arrangements with investors.

[12] For the full list we refer to Article 3 Delegated Regulation.

[13] Delegated Regulation, Preamble (7).

[14] Notice Periods shorter than 3 months need to be explained to the competent authority, Article 5 (8) Delegated Regulation.

[15] Please refer to Article 5 (9) Delegated Regulation.

[16] Delegated Regulation, Preamble (8); a conservative approach is required, i.e. only cash flows that will materialize with a high degree of certainty may be taken into account by the AIFM.

[17] Delegated Regulation, Preamble (10).

[18] Delegated Regulation, Preamble (13).

[19] Articles 7-10 Delegated Regulation.

[20] Delegated Regulation, Preamble (17).

[21] Valuation done in accordance with the AIFMD is considered as being “sufficient”.

[22] Delegated Regulation, Preamble (19). We also refer to our newsletter “ESMA on undue costs”: https://aiqunited.com/editorial/esma-opinion-on-undue-costs-cssf-saq-and-how-they-result-in-additional-documentation-requirements-for-aifms/

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