Successfully distributing private funds to retail investors in Europe – lessons learned from ELTIF

Michelle: Good morning, everyone. Happy Friday, and welcome to today’s webinar on Successfully Distributing Private Funds to Retail Investors in Europe. I’m Michelle Noyes, head of Americas at AIMA. Now, it might seem odd to have an American moderating today’s conversation on a European topic, but increasingly, U.S. firms are seeing how they can approach the retail market opportunities in Europe, given the success they’ve had in similar U.S. channels. Today, we’ll be talking about the European Long-Term Investment Fund, or ELTIF, a regime that allows managers to reach out to non-professional investors on a pan-European basis. And, again, through my participation, trying to put it in a uniquely American context.

This is a topic near and dear to the Alternative Credit Council, AIMA’s private credit affiliate. Recent ELTIF reforms are a culmination of a multi-year advocacy campaign. You can think of it like a regulatory version of a Taylor Swift tour, taking in all the key markets and regulatory institutions. As a reminder, Europe has 27 finance ministries, 27 securities regulators, plus European institutions who all need convincing. Our advocacy focused on three core pillars, highlighting the value of illiquid assets to investors, through our financing the economy research, highlighting the value of having retail private wealth capital, provide financing to SMEs and businesses, and detailing the ways in which the ELTIF could be enhanced to get a broader take-up. As a result of this work, ELTIFs can now invest in virtually the full range of private market strategies, have greater flexibility around product design, and be marketed and distributed to retail clients much more efficiently.

We’ll be getting into all of this today, the market opportunity, the ELTIF framework, and strategies for distribution success, with an esteemed panel of investment managers, legal, and professional advisors. While I have plenty of questions to guide our conversation, I would encourage all of you in the audience to also make use of that Q&A tab, to add additional questions of our own. So, let’s get right into it. I want to first start with a practitioner perspective, and we’re thrilled to have Vivian here from Apollo. So, I’d love to ask Vivian first how she sizes, and she and her colleagues at Apollo, size the European opportunity and really think about how does that compare to the market in the U.S.?

Europe vs. U.S. Market Sizing Approaches

Vivian: Sounds great. First, thank you for having me, Michelle. It’s really great to be here. So, to answer the question, the European market opportunity is certainly very substantial. Clearly, a part of the reason why I’m here. But to frame, I think market studies have generally estimated that global individual investor wealth is roughly, I would say, it ranges from, like, $150 trillion to $170 trillion, with the current addressable assets at about $65 trillion. And while the U.S. market is certainly the largest, at roughly $30 trillion to $40 trillion of that, the European market is very much the second-largest opportunity there. So, you’ll see, kind of, estimates ranging from $15 trillion to $20 trillion in size.

And so, excitingly, these assets held by individuals in the regions are estimated to grow, I think, at a roughly 4% CAGR, based on various studies over the next few years. And so, certainly an area of interest. Bringing this to, I would say, alternative investments perhaps, more specifically, a more traditional institutional investor, as many of you know, have, I would say, an average 15% to 20% alt allocation. But I think where we’re particularly excited, you know, especially as it relates to the ELTIF regime, is the retail investor is significantly under-allocated, at roughly 2% to 3% of alts. And we obviously expect to bridge that gap, hopefully, and to expect that to naturally grow meaningfully. And so, you know, when we compare that to the U.S., like, we’re already starting to see that adoption take place, especially along high-net-worth investors, but there’s still a lot of room to run and education needed to bring adoption higher. And for Europe, especially, I would say that the cycle’s a little bit earlier, but we’re starting to see that, I think, take place as well.

Michelle: Thank you, Vivian. That’s a really exciting backdrop. And I think it’s also important to stress, you know, European vehicles can also be important to reach an audience globally. We’ve seen that with UCITS, and I imagine this is something you’re also seeing as you think about your European strategy.

Vivian: Definitely. Yeah. Asia and Latin America are definitely large markets as well. I think, like, collectively, they’re roughly $8 trillion to $10 trillion in size. And to your exact point, I think one thing we’ve learned from the UCITS market is that European-domiciled vehicles in particular are certainly well-consumed across non-U.S. markets. And so, this really much sets up a great framework for taking a similar approach when it comes to semi-liquid and under the same domicile, and also a familiar regulator.

Understanding Investor Access in the EU

Michelle: Fantastic. And I think it’s always helpful to start with, you know, the commercial viewpoint of why we’re all spending the next 54 minutes learning about this topic. But to layer on a more technical lens, Stefan, I’d love to bring you into the conversation, and just really level-set, you know, what are we talking about? What are we looking at in terms of framework when you’re thinking about your investor access in the EU, and sort of, how do some of these European definitions stack up with the American concepts that we’re used to in terms of accredited investors and qualified purchasers?

Stefan: So, the investor access in the EU is basically twofold. On the one hand, you have, there’s the access to funds investing in listed assets, and the U.S. calls them our public funds. And in the EU, you link it with the UCITS regime, but this is not our topic today. So, I will switch immediately to the other path, which is actually the access to private assets, and the access to private assets, and the U.S. calls them the private funds. There, the situation is a little bit more complex, and it depends on the investor base, which are looking for to target. And in this respect, if it’s intended to go for sophisticated investors in the EU, and the U.S. calls them accredited investors, or qualified purchasers, then we have the professional investor concept in the EU. And this professional investor concept is linked with the MiFID, but also with the AIFMD concept.

And under the AIFMD, you have the passport regime, which is the go-to solution whenever you go for the more sophisticated investors. Whenever you want to target less-sophisticated investor, what you call them, retail investors, then, of course, you will face situations where you need to have a sort of a country-by-country analysis, because some countries have actually an extension of the so-called AIFMD passport, if you look, for instance, to Germany, because there, you have, actually, a semi-professional type of regime. And other countries, they follow a national private placement regime. And this is something you can see in some of the countries in Europe, where it is possible to target some retail investors next to the professional investors, but not on the basis of a passport. Here, you really need to tackle it individually, on a country-by-country basis.

But you have also countries where this doesn’t work, for instance in France, or where it’s practically difficult to achieve, like in Spain. And therefore, we have the golden way, as I call it always, and the fantastic marketing opportunity. You have a fantastic European label, which is called European Long-Term Investment Fund, as you mentioned it at the beginning, the ELTIF, and this allows, actually, to extend the passport regime, which is available for sophisticated professional investors, also to the retail sphere. And this is something which is one of the go-to solutions everyone wants to put in place at the moment, and where we will surely speak a little bit more in detail.

And just two regulations, or two legal frameworks to consider on top of it, of the usage in the AIFMD-ELTIF regime, is, of course, the MiFID regime, and the PRIIPs KID, the so-called Packaged Retail and Insurance-based Investment Products, which is a sort of a product information you need to hand out in the context of a retail distribution in order to be very transparent, and to provide an additional layer of investor protection. And at the moment, the European stakeholders discussing about European retail investment strategy, and they further nail down the rules about liquidity management when it comes to the design of semi-liquid type of products in the ELTIF sphere.

American Funds’ Appetite for European Market Access

Michelle: Awesome. And we will be coming back in just a moment to really dig into what ELTIF means, for those of you who are still rather fresh to this concept. But I’d love to bring Oisin into the conversation, because I know you and your colleagues at Waystone have a long history of talking to American funds about European market access. And I wonder, just, like, at a very, very high level, what is the appetite? Are American funds really, has it been ramping up? Has it been directionally greater interest in expanding to Europe? How has that evolved?

Oisin: Yeah. And thanks, Michelle. I’m delighted to be here sharing some thoughts. So, what’s actually interesting, kind of in the couple of minutes that we spoke, and we had mentioned UCITS three or four times already, right, and I think that’s because, outside of the UCITS vehicles, for U.S. managers, and even European managers, accessing retail investors has been such a challenge when it comes to private markets strategy. So, all that’s really been there has been UCITS products, which don’t allow kind of this private markets access. With the managers that we’ve worked with, we have seen success in the wealth management channels, so, kind of utilizing the Luxembourg SCSp, or even the Irish ICAV in some examples, to kind of build conduit feeder products. But that’s really only been targeting the high-net-worth market and hasn’t really given access to the retail market.

The initial ELTIF product, so, ELTIF 1.0, as everyone likes to call it, again, there was a bit of hope there that that might open up some retail channels, but really, it was only, kind of, French and Italian-focused products that we saw any sort of movement on. So, kind of outside that, then, the last area where we’ve seen a bit of success has been the Luxembourg Part II fund. So, that’s kind of been the shining light, I guess, in European retail distribution. But the problem with the European Part II fund, and kind of, Stefan started to allude to it, is that there, you’re not benefiting from any European passport, you’re going country by country, with some countries actually shut out in terms of, kind of, retail access. So, we’re very excited with the ELTIF, with the updated ELTIF scheme. Our clients are very excited. They see the opportunity in having something that can actually be brought around Europe, and ultimately can generate access, can generate scale. Europe is, as you touched on at the start, it’s a massive market, with massive opportunity there. So, this, finally, we have a tool that can kind of unlock that retail, that wealth management channel fully, and scale the products.

Understanding ELTIF 2.0 and Its Implications for Investors

Michelle: Thank you so much. And right after we get Stefan’s perception of what ELTIF is, ELTIF 2.0 is, precisely, be coming back to you to talk more about that interest, and the sort of questions you’re hearing from your U.S. clients, as this begins to take hold. But Stefan, I think we’ve set the groundwork that there is a market opportunity here. There have been some reforms to ELTIF that make this now a more attractive market. So, let’s lay the table, and explain to everyone what exactly we’re talking about when we talk about ELTIF, you know.

Stefan: Sure. So, actually, when we talk about ELTIFs, you need to…first of all, it’s a European label, which is, on the product side, granted, so it’s supervised by the regulator. They need to grant you, actually, this label, and you run through an approval process. And if we speak about key features, we speak about key features on the investment universe side, and on the investor side. On the investment universe side, put it this way, we can say that an ELTIF, I mean, the idea is a little bit like in the U.S. private funds sphere, to be able to invest in all type of private assets, including private equity, private credit. And this is very important also, I think, for the audience, real estate, infrastructure. And the ELTIF is designed in a way that they are quite open in these type of asset classes. You can have also mezzanine structures, etc., debt instruments.

So, on the universe side, the asset side is quite large. And whenever you want to structure an ELTIF which allows for a certain liquidity in the sense of a semi-liquid product, then, of course, you need to bring in some short-term type of investments, which then deal with the second pocket. And the second pocket is also foreseen by the ELTIF regulation because you can invest in everything what is also listed eligible from a user type of view. And this pocket is exclusively to be reserved for redemptions. On top, and this is maybe something which may be interesting for asset managers operating globally, there’s no geographical limit on the asset side.

If you look to it, it’s unlike a U.S. BDC where you have the 70% limit, where you need to focus on the U.S. There is no minimum expectation when it comes to ELTIF investments on the global side, so this means that an ELTIF could theoretically be run fully with Asian type of assets. There’s maybe one geographical specification to be done when you want to run a secondary type of strategy, fund of funds, because there, there is a limit that you need to invest in EU alternative investment funds. And this is maybe something which is especially coming through the ELTIF 2.0, and which opens a little bit the market, because a lot of ELTIF managers had struggled with not being able to invest through fund structures. And this has been allowed, provided that the target fund itself does not follow another fund strategy.

And just to say, you can plug in your ELTIF product alongside other strategies. If you run your U.S. strategy, you run your EU strategy, you can run next to it your Asian strategy. And the narrative is then, of course, the go-to solution because you can easily reach out to more than professional investors when it comes to the EU 27. And one point, you can make cash borrowings also in the ELTIF context. It’s absolutely fine, but it comes with a limit of maximum 50%. And you need to take into account diversification rules, roughly 20%. This is known also in several countries. So, it’s not really such a brainer to bring in the 20%. There are some concentration rules to comply with, but this is all very much generous if you look at it from an investment point of view. And it’s very in line what, in any case, the market is already doing. On the investor side…

Michelle: Can I just clarify one point? Did you say 50% for that cash borrow limit?

Stefan: Yes, 50%, 5-0, indeed. To the extent that you want to distribute to retail investors, which is one of the main goals of an ELTIF. There’s a little bit more flexibility about all these rules, to the extent that you want to limit the distribution to professional investors only, but this is for specific models. And I think, for the purpose of this, I think we focus more on the retail side. And just to say, on the investor base, you can, again, market to retail investors. There is no minimum size when it comes to the ticket, which is quite important. So, theoretically, you can run an ELTIF like in a crowdfunded approach, but, obviously, you need to cover the operational costs, so, there is, of course, a de facto economic limit. And maybe one point to take into account is that, typically, the investors need to run through a suitability test when you go for the retail end. And there, when you ask now yourself, how can I deal with it? Of course, you will appoint delegates taking care of this, placement agent distributors, who are dealing with them potentially already in the UCITS context, so they have the sufficient licenses in place, and they can help you.

Launching at ELTIF Fund

Michelle: Awesome. So, again, the things that stood out to me, you have a great flexibility across all of our favorite private market asset classes, geographic flexibility, you know, considerations around things like diversification, but 20% giving, you know, quite a wide margin there, and the ability to do some cash borrowing. So, you know, flipping back to Vivian, you are one of the managers who has now gone through this. Can you talk us through your experience in launching an ELTIF fund?

Vivian: Sure. So, Apollo recently announced the launch of the Apollo Clean Transition Equity ELTIF, or what we like to call ACT Equity ELTIF, just so it’s easier. It’s a little bit of a mouthful. This fund is actually on our Luxembourg-based Part II product umbrella, authorized by, obviously, the Lux Regulator, and as you heard earlier, allows us to reach across the continent, and looks to provide options and access points, I would say, across asset classes. At a super high level, though, the ACT Equity ELTIF is designed to provide wealth investors, obviously, in Europe, but also even beyond, with greater access to PE opportunities focused on transition to clean energy and sustainable industry.

And I would say, as Stefan knows very well, we’ve been monitoring the ELTIF for some time. The regulation has obviously been around for quite some time, but we were particularly excited to see the 2.0 changes come in effect earlier this year. And we do think that those changes will certainly help the vehicle move towards its original goal, frankly, of democratizing, sort of, access to the private markets, making them more available to the broad range of investors, especially individual investors. And I would say, like with any new product structure, there’s a lot of research and a lot of client conversations to really understand, you know, what they were looking for, and making sure we had the product and the exposure that they wanted us to offer.

Now, as you heard, you can technically wrap all types of asset classes and things, and there’s flexibility to have and even co-invest alongside your existing strategies. And so, it very much was about trying to optimize what our clients were looking for, and what we felt we could deliver within those legal constraints set out in the ELTIF regime. So, perhaps a bit, I would say, serendipitous, but given the continent’s focus on ESG and responsible investing, as well as, I would say, our firm’s fairly public commitment to being a leading provider of capital for energy transition initiatives, this felt like the right strategy to work with our partners on, and to integrate into an ELTIF wrapper, to reach retail investors in Europe.

U.S. Fund Managers’ Awareness and Reaction to Emerging Opportunities

Michelle: Awesome. And we’ll be coming back to that ESG point, because it is a really critical one. But Oisín, I’d love to hear from your perspective again, what are the conversations like… First of all, are most of the U.S. fund managers aware that this vehicle exists? And what is their reaction and sort of take-up been so far?

Oisin: Yeah. So, firstly, I think Europe has done a very good job in educating and making noise locally, that has garnered a lot of interest from U.S. managers. And when you marry the ELTIF 2.0 and the work that’s been done there by the commission and others in kind of operating the legislation, when you even look at the UK LTAF scheme and kind of how they’re opening up retail channels, the U.S. managers really do see the opportunity in Europe and see the opportunity that the ELTIF brings. Actually, on top of that, another exciting kind of headwind to this story is the European Commission’s retail investment strategy, which they have brought out kind of around educating retail investors in Europe around looking at kind of longer-term investing, educating them around things like investing in private markets, and kind of starting to look at maybe building that gap that’s starting to appear in kind of pension schemes and different things there.

So, I think all of that combined with the success that U.S. managers have had on the ground here in the U.S., with kind of BDC products, interval funds, kind of things like that, I think when you combine the noise out of Europe with the success that managers have seen here in the U.S. with kind of similar style products, it’s the perfect storm for kind of bringing products to market that will be successful in ELTIF wrappers.

Exploring ELTIF Launch Trends and Fundraising Success

Michelle: Thanks. And let’s see if we can bring some numbers to this anecdotal, you know, the first-hand experience, the sort of general anecdotal environment. But Stefan, can you speak to how many ELTIFs have been launched generally by U.S. funds specifically, generally, how fundraising is going in these products?

Stefan: Sure. So, there’s an ESMA register available, which puts a little bit more details in all the numbers. It is a little bit off. It’s not a live stream, so we take all the numbers a little bit with what is the latest communicated information. And there we have roughly 102 ELTIFs which have been launched across the European Union. It could be either in the form of a standalone or it was a sub-fund of it, but in any case, it has been labeled as an ELTIF. And roughly, when I was counting through, I saw that 12 ELTIFs, or let’s put it 12 ELTIFs which have been launched by the U.S. managers. So, you see that there is still some space left. And if you look what are the preferred hubs for it, you see that Luxembourg is actually the preferred hub because you have, like, 65% of all ELTIFs are basically based in Luxembourg.

And on the asset under management side, there is no publicly available statistic, but what you can see is that in general, ELTIFs target around $150 million to $200 million, $20 million, $50 million as a target size for the investors. And a lot of them, to the extent that they are closed and that they may not yet been fully invested, so you have not been fully drawn down, but you see that there are some ELTIFs which were a little bit bigger. There’s one having more than $1 billion as a fund raised so far. So, it’s difficult to say in total numbers, but it’s definitely increasing. And so, there was a figure which was communicated a couple of years ago, but my understanding is not appropriate. If I say now $12 billion, it doesn’t make really a sense. It is more that I think if you look to the individual side, you will see that this is really $150 million to $250 million, and then you could make the mathematics about all $100 million. So, I think there’s a huge potential.

ESG Considerations for European Investors

Michelle: Awesome. And, you know, again, understanding that some of these reforms are quite recent relative to the track record of ELTIF, it is interesting to look, sort of, at the more nascent activity that’s going on post-reform. A few of you had alluded to it, but, you know, ESG is an important conversation, and I’m going to bring Antoine, who’s been waiting patiently here to talk a little bit about it. And there is no ESG requirement embedded in the regulation, but it is an important item to think about when marketing to European investors. So, can you unpack that, Antoine?

Antoine: Yeah, that’s right, Michelle. Thank you. And it’s not me saying, it is Vivian already, right? But indeed, I mean, you know, there’s not in, you know, per se within the [inaudible 00:25:46] regulation any specific ESG requirements, however, it’s crucial, and it’s a very important element to take into account when you think about an ELTIF, for, well, first, because the type of asset class we’re targeting, and the overall philosophy of the ELTIF regime, is very much aligned with all the objectives of energy transition, etc. And as Vivian illustrated, but also, it’s important because, you know, if you’re targeting retail investor in the EU, it is something that, you know, they care about, they have it center in mind. And so, especially coming from a U.S. context, this might be different from what you have at home. And I will let, you know, Oisin comment on that a bit later, but it’s definitely important in the EU.

And once we have said that the next thing, we have to say is that it’s also, let’s say, a tricky or a dangerous environment in the EU, similar to what is the case in the U.S., because you do have a quite dense regulatory framework by now around the topic, that’s been rolled out over the last few years. And, of course, what comes to mind to everyone, you know, very quickly will be the SFDR framework, which is, just, in a few words, it’s a disclosure regime where, depending on how green you pretend you are, you’re supposed to make more or less elaborated disclosures, which are generally referred to as the Article 6, 8, and 9. So, it’s different levels of disclosures depending on how ambitious your, let’s say, ESG or sustainability approach is.

And, I guess, by and large, this is a framework that’s, you know, of course, some things have to be improved, but it’s been around for a couple years now, and, you know, I think most managers have, you know, wrapped their head around it, and are sort of familiar with it, and they’re comfortable with, you know, I should make Article 8 disclosures, I should make Article 9 disclosures, etc. But once you target retail investor, that’s not sufficient anymore because you need to deal with other pieces of regulation, notably around the ESG preferences of retail investor. And this goes beyond the simple 6, 8, 9 categorization of products. And so, you have to start dealing with things like the EU taxonomy. You have to deal with things like the PAI consideration, etc. And so, effectively, the ESG strategy for the EU when you target retail investor cannot simply be on, “Should I be Article 6, 8, or 9?” You have to look at, “Do I want to consider adverse impact? Yes, or no? Do I want to make taxonomy-aligned investment? Yes, or no? Do I want to make sustainable investment? Yes or no?” Because the way you assess ESG preferences of retail investor in the EU is not linked to the 6, 8, 9 categorization. It’s linked to the, you know, more detailed criteria. And so that’s why we see more and more managers looking beyond the 6, 8, 9 categorization, and focusing on more, you know, tailored indicators, let’s say.

SFDR Article Requirements

Michelle: So, Antoine, as maybe your typical American with awareness of all of these terms, but with colleagues in Europe who are subject matter experts, I just want to make sure I have this sort of understanding correctly, and you can walk me through it, so I will be vulnerable here. So, your assumption is, okay, if you’re running an ELTIF fund, you should be prepared to be making some disclosures under SFDR Article…will it be 6, 8, and 9, or a subset?

Antoine: Yeah. All right. So 6, you will have to, because, you know, basically, the Article 6 of SFDR applies to EU-domiciled fund. And it’s basically asking you to explain how you integrate to [inaudible 00:30:00] or the easiest way to understand it is how you take into consideration climate risk in your investment strategy. So, this part of the framework is about, it’s not about saving the planet. It’s not about being green. It’s about telling your investor how you’re going to deal with climate change and how you’re going to make sure that it’s taken into account when you look at an asset, when you make a duty, and when you make an investment decision, and how, you know, you’re making sure that this asset is not going to become a stranded asset, it’s not going to be wiped out by climate change, it’s not going to become inoperable because there are too heavy regulation, or I’m going to lose money because of some new tax, etc., etc., or no one’s going to want to buy the product.

So, everything which is driven by financial performance, and really, the risk side of being Article 6, this is basically, you know, you have to explain how you do it. And, you know, Oisin can jump on that a bit later, but that’s a bit what the SEC is trying to do in the U.S. as well, with the climate disclosure rules, so really, on the risk side. Beyond that, so, as you go target retail investor, if you make any sort of ESG claim, you will most likely fall under the Article 8, which is, again, a transparency regime, which takes, in practice, the form of a template. So, it’s a couple pages, can be something around, like, 5, 6, 7, up to 10 pages, depending on how granular you are. But basically, you have some questions you need to answer to be very clear and transparent towards investor about what exactly it is that you’re doing in the realms of ESG.

So, that would be the Article 8. It’s basically, when you’re promoting ESG, or when you go beyond this mere climate risk integration. And then, for the Article 9, it’s the most ambitious framework, let’s say. This would be in the case where you have the intention of making only sustainable investments, where sustainable investment answers a specific definition. And what’s sometimes confusing is that you could be an Article 8, and partially make sustainable investments, whereas the Article 9 is supposed to make only sustainable investments. So, that’s where sometimes the confusion can come from.

And going back to targeting retail, when you’re assessing ESG preferences of investors in the EU, you are supposed to ask them about sustainable investments, about alignment with the EU taxonomy, which is another regime, listing some economic activities that are considered green by the European Commission. Again, this is really, you know, [inaudible 00:32:43] And so that’s how you assess the ESG preference. And it’s not linked to, “Do you want an Article 6, 8, or 9 product?” So, this is why you need to look beyond this mere SFDR product categorization. And it can be a difficult exercise.

Integrating Principles into ELTIF Products

Michelle: Yeah. No. I appreciate you kind of going deeper with me on that, and hopefully, you know, that’s been helpful to others who might have been having the same questions because, again, it’s not, to your point, just about disclosures, but it really is, you know, more a full embrace of ESG and sustainability. And Vivian, how have you built this into your ELTIF product?

Vivian: Yes. I think the approach is probably even broader than just the ELTIF. Because, for the ELTIF, to that point, I think we can start with the Article 8, but clearly, as Antoine has properly laid out, there’s so much more to it in that. And so, frankly, I think it’s almost better to talk about it at a broader level, because the firm, our firm, has certainly been very committed, I think, to, I think I mentioned earlier, the energy transition theme, but just broader ESG in general. And I think we’ve been very focused on kind of scaling our coverage to make sure that we’re incorporating it across everything we do, not just from investing into lending, but also just global operations in general.

And so, you know, I think, like, depending on, kind of looking ahead here, like, obviously, this approach, I think, it might seem like it has to be tailored differently by region, but I think it’s important that the approach, in many ways, actually allows us to be able to cater to the different preferences and views that different regions might have, across Europe and for the U.S. And so, you know, as you kind of heard Antoine lay out, especially in Europe, a lot of this really does feel like it is driven by regulation. And certainly, the prompting of stronger sort of ESG product offerings, and being compliant with, you know, the aforementioned SFDR standards, and obviously, just having general accountability, is a large part of that. And certainly, of course, the sentiment has generally been positive. But distributors, also, that we’ve been speaking to have been clear that they want this to be what I’m going to call a baseline part of their checklist.

And so, as a manager, frankly, just operating in this space, we’ve been focused, like I said, scaling our coverage, but not just in terms of people, but also via data, via our reporting, to really allow for that ESG integration, to ensure that alignment, and to be able to measure that impact, kind of, across these investments. Again, all of which I think actually lends themselves naturally to expectations that the European market has for managers like ourselves. But I should probably stress, this is not an easy task. Right? And then we understand there’s a lot that goes into this, even in the scoping phase, right? And keeping even up to date on the latest regulatory steps. I think that’s always, frankly, probably even the hardest part. And so, we certainly lean on experts, right, to kind of consult us constantly on that, especially as they continue to evolve.

Insights on European Market Success

Michelle: Yeah. And this is certainly a space where AIMA is doing quite a lot of work. And we have a team in London leading that, as well as a library of resources for members. But I do think it’s important, because, again, it just may not be quite the same mindset, right, sitting in New York and thinking about these issues. And when you want to be commercially successful in Europe, it’s having the right vehicle, and being compliant with it, is one thing, but meeting the needs of your investors and how they think holistically is quite another. So, you know, I really appreciate you bringing that into the conversation, Antoine. And Oisín, you know, again, in your role, where you sit, and you’re working with a lot of American clients on accessing Europe, do they get it? How are these conversations going?

Oisin: Yeah. It’s been an interesting journey, I think, actually not just for U.S. managers, but European-based managers and practitioners alike. I think the ESG journey has been quite interesting and has been challenging. But what we have found is that, particularly firms in the U.S., and kind of non-EU firms, maybe, that were always traditional, or were always successful traditionally raising capital in Europe, that, kind of, when it came to the updates in SFDR, and some of the increased disclosure requirements, it did take some time to kind of get their heads around what’s been asked and why it’s been asked. And kind of, if you look at the U.S. landscape, which has been maybe a slower adopter of, kind of, ESG legislation and frameworks, it has taken some time.

But I think we are at the point now where the majority of managers who are going to Europe, they understand what Europe is trying to achieve, they understand the kind of broad aspects of SFDR, and what they’re ultimately trying to achieve. And frankly, they understand that if you don’t build in some of this framework, that you’re not going to be successful, particularly if you look at regions like the Nordics, who have always been traditional ESG investors, and kind of the retail investor, I think, here, when we’re looking at the ELTIF in particular, I think that’s an area where there will be particular focus around sustainable products, and kind of what can we get out there that will meet, kind of, the [inaudible 00:38:10] requirements that we want to take.

I think it’s Sweden who, they’ve made a push for any funds being brought on to the public pension platforms in Sweden, if they’re not Article 8 or 9, they’re automatically ruled out. And I think, actually, some traditional products that were there are actually being dropped off the platform. And when you look at kind of the Swedish market alone, and the pension market there alone, that billions of dollars that is up for grabs. So, long story short, I think the U.S. managers are really starting to grasp ESG, are really starting to understand what’s required, and are kind of building products that are tailored to the European market, stripping out maybe non-ESG aspects that they might continue to run in U.S. funds, but kind of building in, then, the right aspects on the European side. So, a lot of progress that they made, which is great.

Strategies for Launching and Succeeding with an ELTIF Fund

Michelle: Thank you. So, hopefully, you know, we’ve laid out the market opportunity and size, you know, some of the practical considerations about what ELTIF is, and what can go into it. We’ve talked about ESG and why it’s such an important consideration, even if it’s not directly embedded within this particular rule. But I’d love to just kind of round this out with a little bit more insight into not only how do you launch, but how do you be successful? Right? We all know that it’s one thing to get a product out the door, and it’s quite another to have a commercially successful one, that can raise assets and meet all the goals and aspirations a GP has for it. So, Vivian, putting you in the spot first, as the GP that’s done this, what advice would you give to a firm considering launching such a fund, and what are some of the key lessons that you’ve learned?

Vivian: It’s a great question. I think we kind of heard this maybe in a few places earlier on, but, like, the key is really having a frank conversation with your distribution partners and your clients, and really understanding, kind of, what they need, and bring them into the fold almost. Frankly, this probably isn’t ELTIF-specific, but it is in the sense that it’s obviously the new structure that we’re thinking it through. But, like, general, I would say product development advice that I’ve received, and I believe we practice, where it is certainly more ELTIF-specific is the reality that because you can reach an even broader audience, those who really may be seeing alts for the first time, you have to demonstrate that you’re committed really to the marketplace, and that you’re working closely with your partners, not just on the design, but on the educational effort that’s going to be required there. And that can certainly come in the form of, like, blogs, white papers, other things. But, like, I actually think the educational journey is a really, really important element here.

Importance of Local Language

Michelle: And a very, like, kind of specific follow-up question on that. How important is it to do that in the local language, you know, for non-English-speaking jurisdictions?

Vivian: That’s a great question. Definitely very important. And like everything, especially, it comes in phases, right? So, like, obviously, you want to start with whatever you feel most comfortable in, but I am a strong believer that, like, every or KID should be translated to the local language.

Success Traits Among ELTIF Vehicles

Michelle: Awesome. And we’re getting some great questions in the Q&A. So, thank you. And I’ll just definitely make sure we have some time to get to them. But Stefan, you’ve looked across these 102 ELTIF vehicles. What are some of the commonalities for the funds that have been most successful?

Stefan: Yeah. It was a little bit of work. And just to say that one of the points which I think are very important, which is very important to highlight, is actually that if most of the players which had huge success, they had already a track record in place on the professional type of segment. And so, they come with a product which is already working, and they kind of either enlarge the product, or copy-paste a little bit the strategy. So, that’s an element which is very important to take into account. The ELTIF is made, under the ELTIF 2.0 also, in a way that you can come with your success story, and you can put it in a wrapper, which allows you for retail.

So, you have to sell, eventually, a product which has an investment strategy, which is ideally something straightforward, so that the retail investor can understand it, and they have a story behind. And I think this is a very important point from a perceptual point of view, that the retail investor will get it. And this may imply, and I think that you may be also adapt a little bit what the other, or the other description, the one or the other description in the prospectus, in the commercial documents, because you want to reach not only the professional pension fund, but you want also to make sure that a certain size or a certain category of retail investors will understand your product, and embrace it totally.

And I think the point from Vivian was very important, and essential. It’s education in the national language, it’s even an obligation to have the fund documents in the national language. But I think one other point is really that you have the discussion. You have also, you make sure that you fully understand in the entire organization that it’s a regulated product. So, this may have an impact on the way you’re operating. But I think what we have seen with some of the asset managers is we have been discussing with them the portfolio. We have tried to understand what they want to invest, where are the hurdles, where are the discussion points popping up, to find ways to make it actually happen, and to discuss through, and not to come up spontaneously when the transaction is happening, but to be really, to have the team already prepared for the operational side. And I think it’s very important to bring on all persons who are involved in the project on the distribution, but also on the operation compliance side, so that when you have the investments to be made, that everyone is prepared, and it doesn’t come up as a killer of the entire project.

Operational Realities

Michelle: Awesome. So, I’m hearing, you know, again, it’s both educating your client, but also making sure you are able to articulate a strategy in a way that resonates to them. So, you sort of, I don’t want to say bring it down, but you bring the investors up, but also making sure you’re speaking, you know, in plain enough words that it resonates, and it makes sense. And then, to your point, thinking through the operational implications, making sure, you know, you’ll be able to do these translations into the local language documents, and making sure any other additional follow-on work is well-understood in advance, and properly resourced. And then, Oisin, you know, we’ve talked about, and we’ve referenced sort of placement agents and distributors a few times throughout this webinar. But can you talk on a practical basis, you know, too, will funds need new service provider relationships, new business relationships, to do this distribution? What can they rely on already if they may perhaps have professional products, or UCITS products set up?

Oisin: Yes. So, I think the service providers that you choose to partner with for an ELTIF product, they’re absolutely crucial to success, particularly, again, when we focus on retail investors, that there’s zero room for error. Right? So, you really want to make sure that you get it right. And when you kind of start at the top and work down through, so, when you look at the AIFM, for example, that you look to work, or whether that’s your own internal AIFM or a third-party AIFM, in that scenario, you got to make sure that they understand the product, that they understand the matching of liquid and illiquid assets, kind of, in one semi-liquid product, that they understand the different nuances that the ELTIF’s going to bring with enhanced valuation cycles, the matching mechanism that’s going to come into place, enhanced reporting, all of that. So, choosing your party there, and starting at the AIFM, is extremely important. It’s something, Waystone, we’ve been looking at. We were one of the early movers in kind of bringing some of these products to market for our clients, so it’s an area that we’ve invested heavily in around making sure that we have the adequate tools for our clients there.

And then kind of when you move down through, then, to your administrator, your deposit with custodians, working with a group that really understand, firstly, what a kind of larger retail book could look like coming into these products, and how you manage that, and how you manage the higher volumes, and kind of marrying that with the deep alternatives experience, being actually able to bring the two together under one house. That’s absolutely crucial, also. You have, these products, there’s going to be numerous moving parts that are going to make them complex and difficult to manage. So, not having those partners around the table, they’re going to be crucial from a products perspective.

And then, Michelle, you touched on, kind of, placement agents and distributors. That’s probably the next biggest thing that you need to focus on, because it’s all going to go to having a lovely product that works, but if you’re not getting the product into the right hands of the right investors, then it’s not going to be successful. And when we look at, kind of, the private market groups in particular, who are looking at kind of accessing these new retail and wealth channels, they have experience distributing to institutional investors alone. So, they don’t have experience in a lot of scenarios and kind of going down to the wealth management and retail channels.

So, partnering with the right groups, to firstly get your product into the right channels, and then ensuring that you’re on the right platforms, because that’s going to be key to this as well, right? You gotta be in the right channels, but being on, actually, the right platforms, being in the right shop window, as we like to say, it’s going to be extremely important. And kind of, Europe, it can be somewhat fragmented at the markets. That might mean that where you’ve had one placement agent that’s carried the product to kind of the institutional investors across the region, you might need four or five different banks or different platforms across the region to really get your product out there to, kind of, mass retail, and kind of, individual investors. So, really setting out and focusing on your strategy and who you’re going to partner with, they’re really, really crucial to being successful here.

Establishing New Distribution Relationships for Particular Funds

Michelle: And Vivian, does that match your experience? Did you have to set up new distribution relationships for this particular fund?

Vivian: Yes and no. I think part of it is, like, if you have people, I think, dedicated to coverage, on some level, it’s more about just taking the conversation in a different direction, if that makes sense. But, like, generally speaking, I think that’s right. I think you’ve got, certainly, what I’m going to call, hopefully, this is the right phrasing, local sort of European sort of platforms and players that have already built-up connectivity and that we’re plugging into and are actively looking for ways to expand. And then you also do have, I would say, increasingly classic, I would say, U.S. platforms that are trying to find ways to I think build that connectivity as well. And so, to be frank, I think we’ve looked at both options, and I’ve looked at that in both ways.

Potential of Open-Ended ELTIF Structures

Michelle: Thank you. So, Stefan, I’m going to do a little bit of a quickfire with you for some of these questions that have come in. So, first one. Can ELTIF be open-ended or only closed-end?

Stefan: It can be semi-liquid, so it can be open or closed. It’s absolutely possible, but, of course, you need to take into account that there are discussions at European level at the moment about level two, when it comes to the liquidity management provisions, and there’s maybe an additional layer of regulatory points to be taken into account whenever you plan to go for a semi-liquid strategy.

Pre-Marketing ELTIFs

Michelle: Okay. So, both, with a little bit more work to do if it is open-ended and liquid. Okay. Question two. Is it possible to pre-market an ELTIF? Does the position depend on whether you want to pre-market to professional or retail investors?

Stefan: So, the good thing about Europe is it’s not only the marketing regime, but it’s also about the pre-marketing regime, which, of course, had a huge impact whenever you wanted to test the strategy in Europe. And there was a cross-border directive which came into place last year, and effectively, this is addressed to professional pre-marketing. So, there’s no harmonized system whenever it comes to retail, or non-professional pre-marketing, which means that if you want to do pre-marketing for retail, then you would need, actually, to check still on a country-by-country basis because there’s no harmonized system in place. But for the time being, I mean, we have seen this question a couple of times, and there are a few, very few countries where you could theoretically go this road, but if not, it remains a little bit as you see in the usage sphere, where you don’t do, actually, pre-marketing. So, you stick in the pre-marketing with the professional appetite, but you don’t do this really in the non-professional.

ELTIF Passports

Michelle: Awesome. And, you know, somewhat related. Do you have to passport the ELTIF into each jurisdiction, or can you respond to a reverse inquiry?

Stefan: When we speak about the true passport, about the AIFMD passport, then, of course, AIFM has a relevant passport, and they will actually notify the relevant countries where they want to go for the marketing. So, it is an information notification process, but it’s not that you have now, like, like you have it for the private placement regime, where you have to undertake a sort of a registration process.

Perspectives on Listing ELTIFs

Michelle: Wonderful. Well, I think we’ve covered quite a lot of ground in this conversation, and it’s been really instructive to have the perspective of those who have done it, especially as an American, you know, U.S.-headquartered firm, and then, you know, as well as the perspective of legal advisor and, you know, broader professional service provider, who can operationalize this. Got one more question. Just about to wrap up. Anybody else? Last call for questions. So, Stefan, back to you, as I interrupt my nice closing remarks in the interest of squeezing every last juice from this lemon. Does it make sense to list an ELTIF vehicle to attract retail investors? So, is listing an extra step that one would have to do?

Stefan: I mean, an ELTIF, it can make sense, to the extent that you want to make use of an additional layer of liquidity, because we were speaking about semi-open or closed-ended solution. But you can definitely also think about a listing venue. And by this means, you can organize a transfer, a mechanism by means of liquidity. And the ELTIF is even incentivizing this because they have put in the ELTIF regulation a clear statement that you may not prohibit to do the listing, which means that there is an idea, an underlying idea, to organize liquidity differently. And by this means, you can go away from facing risks of certain redemption requests, and you would work with a transfer system.

And we have seen this in the retail space, in the retail place already. We see this in the regulated fund world. And this is an option. And apart from this, you could combine all of these types of options also, when speaking about matching, follows a little bit, it’s a similar idea. You have a transfer type of idea, which means that your commitment size remains neutral, it has no impact, because you have an exiting investor and you have a new joiner, which is basically taking over the position. I think the listing venue is actually a very good venue, but for this, again, you need perception, and you need the market. And I think, now, with having more than 100 ELTIFs, I think there is, of course, an appetite growing and growing. And I know that some stock exchanges are looking actively in it, including Luxembourg venue, because, given that Luxembourg is one of the biggest ELTIF hubs, of course, you can benefit from synergies in this context when you put this also in Luxembourg. But this I say because I’m working for a Luxembourg law firm.

Global Potential for ELTIFs

Michelle: Excellent question, Anan. I think that brought out another dimension of ways to success in this vehicle. I will also answer a question that came up in our prep call, related to, again, some of the appetite outside of Europe for these vehicles. So, I was chatting with a friend who was recently in Chile, with a Luxembourg delegation, because, you know, again, we spoke about that these funds are not restricted to European investors but have a broad non-U.S. base. And she had indicated that it’s still very, very new and novel, but kind of, the breakout rooms on these sessions were quite full, so there seems an appetite for education, and one could expect, then, you know, the success that UCITS and other European vehicles have had in these markets, you know, ELTIF could also be quite relevant. So, again, I think it’s important that listeners think about this, not only in a European context, but also as they think about Europe and Asia.

Concluding Remarks

But with that, we are officially at time, so please thank you hugely to Vivian, Oisin, Antoine, and Stefan, and, you know, Stefan for all of your work in pulling this webinar together. I know it’s been something we’ve been speaking about a lot. I hope we fulfilled the goals of really demystifying it a bit. I know when you think about European regulation, it’s a lot of acronyms, but it really is very, very dynamic. AIMA has quite a lot of resources, given all of the time we’ve spent on ELTIF. So please do look at our website for more. I know, also, you know, Stefan, Oisin, Waystone, Arendt, you all have a great deal of expertise, and would be happy to connect offline to continue these conversations. So, thank you, everyone. Enjoy the rest of your Friday and speak soon.