What new options are investors and savers considering? The first is to accept a higher risk profile (and therefore higher volatility of returns) in order to be able to achieve the performance levels that used to prevail.  Another alternative is to replace part of the bond and equity allocations with less liquid (or even much less liquid) investments such as hedge funds, real estate funds, private debt, or venture capital.

It is worth noting that alternative investments have experienced remarkable growth over the past decade. Just before the great financial crisis of 2008, they represented about $5.3 trillion. By the end of 2020, alternative investment firms were managing some $13.9 trillion in assets. This amount could grow to more than $21 trillion by 2027.

Alternatives by type in US$tn (Base case scenario)

Source: PwC Asset and Wealth Management Research Center analysis.

However, these alternative investments have traditionally been difficult for non institutional investors to access due to the lack of suitable products, high minimum thresholds, complexity of the underlying investments and low liquidity. But the situation is changing.

What are the main characteristics of an 
ELTIF?

An ELTIF can be considered the equivalent of a UCITS (Undertaking for Collective Investment in Transferable Securities) for illiquid assets. However, the ELTIF has particular risks and complexities associated with its closed-end form and the nature of its underlying investments, which are essentially illiquid.
The biggest disadvantage of the ELTIF (compared to traditional UCITS) is that it is not "liquid": indeed, investors must consider holding it for its full term, typically about 
10 years, although this varies from one ELTIF to another. The closed-end structure implies that capital is invested 
at the outset, and that investors then typically receive distributions, corresponding to the return of capital and performance over the remainder of the fund's life.
In terms of geography, ELTIF version 1.0 stipulates that investments must be tied to the EU economy (which limits diversification for end investors).

The main benefits are the following: 

• Access to a diversifying asset class: ELTIF allows retail investors to access asset classes that were previously off limits.
•  No double layer of fees: in version 1.0, investment through funds is not allowed.
• A very low minimum investment (usually from 10,000 euros).
• Attractive risk/return trade-off: ELTIFs have a long-time horizon, which often means higher expected returns and lower volatility (no daily or weekly NAVs for the underlying assets).
•  Simplified structure and administration: ELTIFs are structured specifically for private investors to reduce administration, e.g., with fewer capital calls, a shorter investment period and tax returns designed for retail investors.
• A pan-European distribution passport that increases the fund's ability to reach critical mass: from the perspective of European asset managers, ELTIFs are virtually the only vehicle capable of distributing private market investments to retail investors throughout Europe. Blackrock believes that ELTIFs could be as successful as the UCITS format. Note that ELTIFs can also be marketed outside the EU in the form of private placements.

It is worth noting that the conditions to qualify as a "real asset" have been relaxed under ELTIF 2.0. Green bonds, fintech and other real assets are now part of the investable universe.   

In addition, the capitalization threshold, portfolio composition requirements, asset diversification limits, and concentration risks have been modified to broaden thescope of eligible assets for an ELTIF. Whereas version 1.0 did not include funds (it was a direct deal fund), version 2.0 can - under certain conditions - invest in funds.

Regarding the redemption modus operandi and liquidity, ELTIF 2.0 remains basically a closed-end fund product. However, it is possible to create semi-liquid structures within ELTIF 2.0.

ELTIF 2.0 also includes a new provision for secondary trading of shares/units of an ELTIF. Finally, investors can choose between two ELTIF structures: with calls or fully funded at launch. The advantage of the fully funded vehicle is that it allows clients to avoid receiving a series of calls. The fully funded model comes with potentially shorter investment periods and "J" curves. But there may be a trade-off in the form of lower performance due to holding cash (or other liquid securities) in the fund until the capital can be fully deployed. 

In terms of jurisdiction, Luxembourg seems to be well positioned to benefit from ELTIF 2.0, given its worldwide reputation as a location for investment funds and its favorable local legal framework that will allow for the establishment of different ELTIF structures for different types of investors (from retail to high-net-worth individuals, from semi-professional to professional). 

Sources: Blackrock, Société Générale, www.aima.org, GVZH Advocates