Retailisation choices: ELTIFs, LTAFs and Luxembourg Part II funds
26 February 2025Much has already been written about the retailisation of private investment opportunities (that is, providing non-professional investors with access to private asset classes that historically have been the preserve of institutional investors).
For private fund managers, the benefit of retailisation is clear: an opportunity to raise additional capital and increase assets under management via an expanded investor base. The challenge is to find the right approach to execution: designing and implementing an investment structure that can be distributed to the intended non-professional investor base, whilst complementing (and not compromising) a manager’s existing institutional offering.
The development in recent years of regulatory wrappers such as the European Long-Term Investment Fund (ELTIF) and the Long-Term Asset Fund (LTAF), as well as the growth in popularity of the Luxembourg Part II fund, have provided managers with a range of potential solutions. Faced with these alternatives, managers should remember that there is no “one-size-fits-all” solution, and that the right route will be determined by the location and type of investor being targeted.
ELTIF
The ELTIF regime can be used by an EEA alternative investment fund (AIF) with an EEA alternative investment fund manager (AIFM). The principal benefit of an ELTIF is an EEA-wide marketing passport for both professional and retail investors. An ELTIF can therefore be widely distributed across a European retail investor base.
An ELTIF is a regulated product. It must itself be authorised, and must comply with detailed investment restrictions, as well as concentration and borrowing limits; consequently, it often will not be the right fit for a manager’s investment strategy.
Under the new ELTIF 2.0 rules, an ELTIF now has greater flexibility to offer investor redemptions, which could be a compelling feature for a private wealth investor base wanting a degree of liquidity.
LTAF
An LTAF is a UK regulated fund, authorised by the FCA, that can be offered to all categories of UK investor. Importantly, and unlike traditional private asset funds, LTAFs qualify as “permitted links”. This means they can be invested in by UK defined contribution (DC) pension schemes via life wrappers (which, for regulatory reasons, can only invest in permitted links).
As a UK fund, an LTAF cannot use the AIFMD marketing passport to access investors in the EEA. If marketed in the EEA, it would have to rely on the local national private placement regimes in individual member states (NPPRs).
An LTAF must be open-ended, but there is considerable flexibility in designing the redemption terms, so long as redemptions are no more frequent than monthly and are subject to a 90-day notice period. An LTAF must have a prudent spread of risk, and is subject to borrowing limits, but can act as a fund-of-funds or as part of a master-feeder structure.
Luxembourg Part II
The Part II regime is a domestic Luxembourg regime. A Part II fund is a regulated product, authorised by the Luxembourg regulator (the CSSF) and can accept investment by both professional and retail investors. It can use the AIFMD marketing passport to access professional investors in the EEA, but can only access retail investors under the NPPRs. In practice, this means retail distribution is only possible in some countries (e.g. Germany and the Netherlands) and not possible in others (e.g. France or Spain).
As a regulated product, a Part II fund must comply with certain diversification requirements, but these are not usually problematic for most private investment strategies.
Part II funds are typically (but not always) open-ended. As part of the authorisation process, the CSSF will want to be satisfied that the fund’s proposed portfolio liquidity aligns with the liquidity offered to investors.
We see managers using these options either as standalone vehicles or as building blocks forming part of a broader offering. For example, an LTAF (to raise capital from UK DC pension schemes) which in turn feeds into a Part II fund (or a more lightly regulated fund, such as a Luxembourg RAIF, if investors can meet the eligibility threshold), which acts as the primary fund vehicle (perhaps investing alongside the manager’s “flagship” institutional fund) and which is distributed to eligible non-professional investors in “friendly” NPPR jurisdictions like Germany and the Netherlands.
As well as the more recent retailisation options considered above, managers should not overlook more traditional avenues (such as private bank feeders for private wealth investors), which can be the right solution in certain circumstances.
The critical point is always first to identify the target investor base, as that will drive everything that follows. In our experience, managers often find it helpful to partner with a cornerstone investor or distributor early in the process to help design the right structure and provide certainty of execution.
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