In the previous episode of the Capital Markets Union series, we explained what this European program consists of and what its main objectives are.
In this second episode, we will illustrate how ELTIF funds work and why October chose this vehicle to support its international growth.
One of the pillars of this program is the creation of a common regulatory framework to ease the adoption of investment vehicles supporting real economy. The European Parliament’s (EU) 2015/760 Regulation established a special vehicle called European Long-Term Investment Fund (ELTIF).
What is an ELTIF?
It is an investment vehicles that collects and channels financial resources to small and medium-sized enterprises. ELTIF funds offer long-term investment opportunities to both institutional and private investors.
What makes ELTIFs the ideal vehicle to stimulate investments in real economy?
A substantial part of the investments (at least 70%) must be directed to instruments issued by companies with the following requirements:
1. They are not financial companies;
2. They are either unlisted or listed companies with a capitalisation of less than 500 million €;
3. They are based in a EU country or in other countries that meet certain requirements regarding money laundering, counter-terrorism and taxation policies.
The instruments issued by these companies may be equity, quasi-equity or debt instruments. Thanks to ELTIFs, European SMEs can access financial resources that are complementary to their bank credits, diversify their sources of financing and protect themselves from the negative effects of credit crunch.
How are retail investors protected?
The legislation aims to create a vehicle that directs financial resources towards European SMEs, ensuring broad protection for retail investors who wish to participate to this process. The tools used to accomplish this goal are the prospectus and the eligibility test.
The prospectus enables investors to make an informed assessment regarding the proposed investment and, in particular, the risks attached thereto; while the eligibility test makes an assessment of their suitability for the investment they intend to make.
What has held back the development of an alternative European financial market to date?
One of the main reasons that has limited the creation of a European alternative finance market to date is the presence of different regulatory regimes within the European Union. ELTIF funds solve this critical aspect and their international operability is a key factor for October expansion. It is precisely for this reason that we have decided to establish our 2nd ELTIF, subscribed by institutional investors such as under this form.
Thanks to ELTIF funds, lending platforms will finally be able to operate on an international scale and European companies will have the opportunity to access new financial resources from multiple countries at once. These instruments allows a simpler circulation of capital in a unique market where investors and players (investment companies, fund managers, alternative finance platforms, etc.) can meet.
Our business model could not have existed two years ago. This is the Fintech effect. The removal of national barriers is the most important challenge for our industry. ELTIFs are an ideal tool for platforms, like October, who aim to become a point of reference for small and medium-sized European companies providing solutions to support their growth.
Now that the tools are in place, will European players be able to seize the opportunities and operate on international scale?
In the next episode, we will review the proposals that are currently being discussed by the European Commission regarding the creation of a framework of shared rules for lending and equity crowd-funding platforms.