21 October 2013

Responses to the ELTIF proposal: FESE, Insurance Europe, PensionsEurope

The Commission proposed a new investment fund framework for investors who wish to put money into companies and projects for the long term. The objectives are broadly welcomed but solutions to make ELTIFs viable investments for insurance companies are needed.

FESE supports the objectives of the European Long‐term Investment Funds framework but says that as currently designed, the draft Regulation will not achieve its purpose because its scope of eligible assets excludes any instrument listed on regulated venues. This means that thousands of companies issuing well‐regulated, transparent instruments will be excluded from the benefit of a larger investor pool in their assets created by the ELTIF framework.

FESE believes that:

• First of all, any threshold differentiating between listed and unlisted instruments should be removed. There is no reason to limit investing in listed instruments to 30 percent of an ELTIF portfolio.
• Second, listed SMEs should be expressly in the scope of eligible investments. If a threshold of size were to be used to define an SME, FESE suggests a range between €500 million and €1 billion, based on the difficulties reported by SMEs below these sizes when accessing capital markets.

These changes together will ensure that the ELTIF framework would boost investor demand at the initial and trading stages when an SME is accessing capital markets and that listed assets in general also benefit from these new investor funds.

Separately, FESE would like to stress that the ELTIF Regulation should be designed and implemented in such a way that it brings net value‐added to the other initiatives or current regulation. With the introduction of AIFM, cross‐border obstacles in relation to offerings to professional investors have been removed, while retail investors may be less interested in investment opportunities of this nature, in particular given the terms and alternatives being available (e.g. funds etc). The goal of the ELTIF framework should be to increase private sector investment in infrastructure projects, and not simply to replace or re‐structure existing investment levels.

Full response

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Insurance Europe

While ELTIF appear to have significant potential to respond to insurers’ liability-generated portfolio needs, the prudential treatment of these assets under Solvency II plays an important role in defining their attractiveness for insurance companies. The ELTIF proposal, as currently envisaged, has the potential to create capital disincentives from two perspectives:

• With respect to available capital, the price volatility generated by the secondary market trading would generate volatility in insurers’ own funds and solvency positions, despite the fact that insurers would use these assets to match long-term and illiquid liabilities.
• With respect to required capital, reflected in the solvency capital requirement (SCR) for ELTIF, the currently envisaged capital charge for ELTIF would be at 49%, similar to that applied to the most risky equities. Insurance Europe considers that such a charge is not reflective of the long-term risks actually faced by an insurance company investing in ELTIF. Insurance Europe would therefore advocate that the capital treatment of ELTIF should reflect the real risks embedded in the funds’ long-term and illiquid underlying assets.

Unless these capital/volatility issues are addressed, interest in ELTIF from insurance companies will be very limited. This would be a shame, since holders of long-term illiquid liabilities such as insurance companies are in Insurance Europe’s view the main and potentially the only investors who would be interested in them. Insurance Europe would be happy to engage in discussions on how Solvency II Delegated Acts can be adapted in order to reflect an appropriate treatment of ELTIF and thus help make them a viable investment for insurance companies and support their success.

Press release

Full position paper

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PensionsEurope

Pension funds and other institutions for occupational retirement provision (IORP) are very suitable long-term investors due to the match with the long duration and maturities of their liabilities. Mutual investment vehicles such as ELTIFs are particularly important for small and middle-size IORPS, since they allow them to invest in long-term projects without jeopardizing the diversification of their asset allocation strategy.

Pooled investment vehicles such as European Long-Term Investment Funds (ELTIF) could be attractive for IORPs, especially for smaller and medium-sized ones. These IORPs may particularly benefit from economy of scale and access to asset-specific knowledge and expertise. Pooled investment vehicles are important for smaller IORPS so that they can invest in long-term projects without jeopardizing the diversification of their asset allocation. Furthermore, by pooling existing knowledge, institutional investors may profit from each other’s expertise in different areas so that all of them stand to gain from a pooled investment vehicle. However, PensionsEurope believes that the ongoing IORP revision will play a significant role in determining the effective IORPs investment level in ELTIFs. In particular, the application of Solvency II like rules would limit IORPs investment in ELTIFs, requiring high capital requirements in case of investment in illiquid assets.

Full position paper, 25.11.13

See also: Finance Watch evidence at EPP-Group hearing on ELTIFs, 13.11.13