ELTIF 2.0 RTS: key features and implications

Our Investment Funds experts in Luxembourg unpack the regulatory technical standards issued for ELTIF 2.0, the European Union regime for alternative investment funds.

On 25 October 2024 the long-awaited Commission Delegated Regulation (EU) 2024/2759 (the Delegated Regulation) relating to European long-term investment funds (ELTIF) was published in the Official Journal of the European Union.

The Delegated Regulation supplements Regulation (EU) 2015/760 [1] and Regulation (EU) 2023/606 [2] of the European Parliament and of the Council (together the ELTIF Regulations) with regard to regulatory technical standards (the ELTIF RTS).

In this guide, we summarise the key points outlined in the regulatory technical standards (RTS), including the life cycle of an ELTIF, financial derivatives instruments, redemption policy and liquidity management tools and tax considerations.

What are ELTIFs?

ELTIFs are the only fully harmonised type of regulated investment funds dedicated to long-term investments and are available to both professional and retail investors. 

For an alternative investment fund to be authorised as an ELTIF, it must be managed by an authorised EU alternative investment fund manager [3] (the ELTIF manager) and comply with all the requirements contained in the ELTIF Regulations.

Timeline of ELTIFs

• On 29 April 2015 the European Parliament and the European Council adopted the first ELTIF legal framework (Regulation (EU) 2015/760 (ELTIF Regulation) commonly known as ELTIF 1.0)

• On February 2023, the review of ELTIF 1.0 was concluded with the adoption of the amending regulation (Regulation (EU) 2023/606), commonly known as ELTIF 2.0, applicable since 10 January 2024. The objective of this revision was to increase the attractiveness of the ELTIF products

• ELTIF 2.0 mandated the European Securities and Markets Authority (ESMA) to adopt regulatory technical standards on various aspects

• On 19 December 2023, ESMA proposed its draft RTS to the European Commission

• On 6 March 2024, the EU Commission gave its views on the draft RTS, communicating to ESMA its proposed amendments and reiterating the necessity for the draft RTS to remain not only within the mandate under the ELTIF Regulations, but to also align with the objectives of the ELTIF reform [4]

• On 19 July 2024, the European Commission adopted the draft RTSs with the amendments it considered relevant and submitted the delegated act to the Parliament and the Council for scrutiny. The examination period ended on 21 October 2024

• On 25 October 2024, the European Commission Delegated Regulation was published in the Official Journal and came into force on 26 October 2024

• On 25 October 2024, the Luxembourg Commission de Surveillance du Secteur Financier (the CSSF) issued communication explaining that it has updated its ELTIF application questionnaire [5] (section 5 Redemption Matching) that must be used for all new applications submitted as from this date

• The Luxembourg law of 6 February 2025 enacted subsequent to the passage of the bill of law n°8387 and was published in the Official Journal on 10 February 2025. This legislation integrally implements ELTIF 2.0 into the Luxembourg legal framework.

Key takeaways from the Delegated Regulation

Financial derivatives instruments

ELTIFs are not allowed to use derivative financial instruments except where such instruments are used solely to hedge the risks inherent in the ELTIF's other investments. In this context, Article 1 clarifies the conditions for using financial derivative instruments strictly for hedging the risks inherent to other investments of the ELTIF.

The financial derivative should be economically appropriate for the ELTIF (economic appropriateness criteria), consistent with the risk profile of the ELTIF and aim to mitigate investment risk at the ELTIF level (risks condition). The underlying assets of the derivative financial instrument must also be the assets to which the ELTIF is exposed or at least assets in the same asset class which are economically similar (underlying asset condition).

Life cycle of the ELTIF

The long-term nature of the ELTIF may be impacted by the underlying assets and their liquidity profile. As such, Article 2 lists the considerations for determining whether the life of the ELTIF aligns with the life cycles of its individual assets [6].

In this respect the ELTIF Manager shall pay attention, among other things, to the liquidity profile of the ELTIF (each asset and the overall ELTIF portfolio), the timing of asset transactions in relation to their economic life cycle and the duration of the ELTIF, the investment objective, the redemption policies, the cash management needs, the asset exposure management, the valuation and the portfolio composition of the ELTIF.

Minimum holding period

The minimum holding period [7], when it exists, can allow the ELTIF to complete the investment of its capital contributions. Article 3 clarifies the criteria the ELTIF manager should take into account to determine the minimum holding period. The latter should consider the various circumstances of the ELTIF and verify that the minimum holding period aligns with the ELTIF’s long-term investment nature and strategy.

The ELTIF manager should also consider the composition and duration of the asset portfolio, the ELTIF’s redemption policy, and its overall investment timeframe. Upon request, the ELTIF Manager must be able to justify the appropriateness of holding period to the competent authority of the ELTIF.

Redemption policy and liquidity management tools

Minimum information: Depending on the European Member State of origin of a given company, its redemption policy may not systematically be disclosed in its articles of incorporation. For the sake of transparency and investor protection, Article 4 of the Delegated Regulation sets out the minimum information about the redemption policy and liquidity management tools the ELTIF manager should provide to the competent authority of the ELTIF.

At the time of the authorisation of the ELTIF, the ELTIF manager should be able provide, among other things, a detailed and complete redemption policy that contains information on the frequency of the redemption, the description of available liquidity management tools and the conditions for redemptions. The entities managing the redemption process should also be communicated.

Any substantial changes to these elements should be notified at least one month before the change is effected with the regulator having 20 days to respond. Additionally, ELTIF Managers should provide, upon request by the competent authority of the ELTIF, up-to-date details on the use of liquidity management tools and outcomes of the liquidity stress test.

Main requirements: Article 5 lists the requirements to be fulfilled by the ELTIF in relation to its redemption policy and liquidity management tools [8]. For ELTIFs that allow redemptions during their life, the redemption policy must include clear guidelines on redemption conditions, timing, frequency and notice periods. It should also describe available liquidity management tools (in non-technical terms for retail investors) and indicate if partial repayments in kind are allowed.

Article 5 lists also all of the features that need to be taken into account by the ELTIF Manager when the later assess the liquidity profile of the ELTIF. For frequent redemptions (more often than on a quarterly basis), the ELTIF manager shall justify this frequency to the competent authority of the ELTIF.

If liquidity falls below certain thresholds, the ELTIF manager must take steps to restore liquidity. Additionally, ELTIF manager can select optional anti-dilution tools like redemption fees or swing pricing to manage redemption effects. A competent authority may exempt professional-only ELTIFs from certain disclosure requirements.

Percentage of liquid assets to meet liquidity profile: The maximum liquidity to be offered in an ELTIF should be determinable and the probability of suspension of an ELTIF should be reduced in order to allow the ELTIF to implement investment strategies in long-term assets. For that reason, the ELTIF Manager should make sure that redemptions are restricted to a portion of liquid assets and that liquidity mismatches are prevented.

Accordingly, as per Article 6 of the Delegated Regulation, when setting the percentage of liquid assets of the ELTIF for allowed redemptions the ELTIF manager should consider, among other things, the ELTIF liquidity profile, the life-cycle of the assets of the ELTIF, the ELTIF’s stability and potential redemption frequency and impact on other investors. This percentage must be compatible with the ELTIF’s redemption policy and valuation procedure of the ELTIF.

Transfer requests

Matching mechanism: When an ELTIF permits full or partial matching of a transfer request (aligning purchase and exit requests from investors) [9], the ELTIF manager must establish clear matching policies that content all of the items listed under Article 7 of the Delegated Regulation. This includes the format, processing, and frequency of matches, alongside settlement and safeguarding procedures to protect investor interests.

If redemptions [10] are also available, the policy must clearly distinguish redemptions and matching [11].The policy for matching requests shall be appropriate for the ELTIF and its investors.

Execution price of transfer: Article 8 of the Delegated Regulation sets out the requirements for determining the execution price and pro ratio conditions where the transfers are matched. Accordingly, the ELTIF manager can set the execution price by using the net asset value (NAV) or other methods, ensuring fair treatment of all investors, particularly when redemptions are allowed.

If the execution price is based on NAV, the ELTIF manager should align the transfer with the ELTIF’s valuation dates. If not, the ELTIF manager should implement such matching outside the valuation dates of the ELTIF. In case of mismatch between existing and potential investors, the policy for matching request of the ELTIF shall specify purchase and exit orders, the policy must clarify among other things how unmatched requests are handled (cancellation or carryover).

List of information in case of transfer: In line with Article 9, when transfers are matched the ELTIF must disclose to investors a list of information depending on whether or not the execution price is based on NAV. This includes, among other things, the dealing dates and settlement periods, the deadlines for purchase or exit orders and the rules governing pro-rata matching conditions.

The ELTIF manager is responsible for keeping this information up-to-date. If the ELTIF allows redemptions, the ELTIF manager should clarify to investors the difference between such redemption and the matching period.

Assessing market for potential buyers of each asset

Article 10 sets out, for each asset, the element an ELTIF Manager should evaluate when assessing the market for potential buyers. Accordingly, the later shall assess the presence of potential buyers in the market, the potential buyers’ reliance on external financing, the length of time necessary to locate buyers if none are immediately available, the specific maturity profile of the asset and potential risks from political changes or market conditions.

Valuation of assets for divestment

Market events may significantly alter the valuation of ELTIF assets and thus harm investors' interests. Article 11 clarifies the criteria for the valuation of the assets to be divested. The valuation of the assets to be disposed of must be carried out at a time sufficiently close to the start of the disposal of the assets.

Costs

To align the disclosure of the costs of investing into an ELTIF, Article 12 clarifies calculation methodologies and presentation format of costs that are incurred by investors. Accordingly, setup costs and acquisition costs for an ELTIF should include all administrative, regulatory, depositary and custodian services paid to the ELTIF manager or to a third party. Management and performance fees, distributions costs and other costs (including service providers fees) are also defined.

Tax considerations

From a Luxembourg tax perspective, the Delegated Regulation should have no impact. The tax treatment of an ELTIF will depend on its legal form and applicable product law. Specifically, an ELTIF should generally be income tax exempt and exempt from annual subscription tax if it falls under the product law governing Part II UCI [12], SIF [13] or RAIF [14].

Conclusion

By clarifying and harmonising the ELTIF Manager's operational requirements and, in particular, transparency obligations with regard to redemptions and liquidity management tools, this technical briefing has addressed the concerns related to the impact of ELTIF 2.0 on open-ended ELTIFs. From a business perspective, the publication of the Delegated Regulation has every chance of stimulating retail investors' interest in this product.

The Delegated Regulation also completes disclosure requirements for a broader comprehension of retail investors as the ELTIF prospectus must contain appropriate and detailed information on the ELTIF's liquidity arrangements.

How Ogier can help

Luxembourg offers a broad and highly flexible legal framework to meet the needs of ELTIFs, ELTIF managers and investors, making it the first choice for the launch of ELTIFs.

Our dedicated Investment Funds team in Luxembourg can advise funds and their managers on compliance with the new rules and their implementation. For more information, please reach out to the team listed below.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice