ETILFS: The next great revolution for investors

Gradually, private capital is making its way into the portfolios of retail investors thanks to a regulatory trend that is opening doors to more investors, offering an investment strategy noted for its high returns and ability to invest in the real economy.

The latest trend in investments is ETILF, a vehicle promoted by the European Union, allowing retail investors to access private markets with no minimum investment but with all the protection guarantees promoted by Brussels and member states.

While its adoption will mark a significant change in the participation of retail investors in private markets, there is still uncertainty surrounding its taxation and regulation. At Crescenta, we are closely monitoring these aspects to launch this vehicle as soon as possible.

In 2015, the European Union created ETILF, a private capital investment vehicle, with the goal of channeling capital into long-term European investments in EMS' and real assets of the EU, and facilitating the entry of retail investors into private markets.

However, the lack of flexibility in its investment policy has hindered the expected development, resulting in a limited number of funds, a limited number of jurisdictions, a portfolio composition biased towards certain investment categories, or a reduced volume of net assets, as noted by FinReg (a specialized law firm).

In an effort to rescue and enhance the vehicle, the EU has modified the original regulation, giving rise to what are known as ETILF 2.0. Here are three changes:

1. Broaden the eligible portfolio companies and suitable assets (e.g., the possibility of investing in fintech with less than five years of life is opened up).

2. Raise diversification limits: a retail investor can access a single fund through a master-feeder structure and create a portfolio to their liking (although this is only recommended for sophisticated investors, as it requires sensitivity in choosing between similar funds (EQT vs. Cinven vs. CVC vs. Advent…).

3. Expand the retail distribution regime: after observing that the minimum investment limit of €10,000 and 10% of the portfolio create significant obstacles to accessing ETILF for retail investors, these requirements have been removed.

Its implementation will bring about a real change for investors and the private capital sector since, finally, all types of investors (if they pass the MiFID tests) will have access to more than 95% of companies (only less than 5% are publicly traded). Additionally, it is a vehicle that can be marketed throughout Europe.

Moreover, according to EFAMA: "ETILF will provide retail investors, who typically have not had access to private markets, an additional investment opportunity backed by a robust regulatory framework.

The ETILF Regulation aims to facilitate the raising and channeling of capital into investments in the real economy, and will allow investments both inside and outside the EU, with no minimum threshold for investments within the EU.

They will play an important role in providing an alternative source of financing to all sectors of the real economy, including the following:

To understand these changes, it is useful to review the latest laws that have allowed private capital to be introduced into the portfolios of (almost) all investors.

Our first stop is at the end of 2022. After years of providing good returns to large investors and positioning itself as one of the most profitable strategies, a law was finally passed in 2022 that opened the doors of private capital to small savers and investors.

The "Crea y Crece" Law reduced investment limits from €100,000 to €10,000, marking a milestone for those investors who had been waiting for the opportunity to make their savings profitable through investment in private markets. If their financial assets do not exceed €500,000, retail investors can access these markets as long as they receive advice and the investment does not represent more than 10% of their assets.

However, this is only the first step in democratizing access to private capital. It seems that little by little more milestones will be achieved, and the door will open wider.

The next big change, which has come recently, has been the lowering of the limit in free investment funds (FIL) or hedge funds. The minimum investment was €100,000 and has been reduced to €10,000. This change comes thanks to the approval of a Royal Decree that modifies the Law on Collective Investment Institutions (IICC).

Or without going into laws or dates, we could say that one of the big changes has been to strip private capital of that adjective that already made little sense, transitioning from venture capital to private equity.

This content is purely informative. It is financial training content provided by Crescenta, with no intention of issuing any personalized investment recommendations.

It is in no way an advertisement for any type of financial instrument, nor a recommendation or offer to buy.

Author

Crescenta