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Accelerate Eltif 2.0 with digital distribution and tokenisation

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by FundsDLT
| 29/01/2024 16:30:00

The revised regulation for the European Long-Term Investment Fund (Eltif 2.0) presents asset managers, distributors and financial advisors with real opportunities. But it is also a chance to lay the foundations for a more modern digital distribution model, says Paolo Brignardello of FundsDLT. 

Despite its worthy aim of being a true pan-European investment fund that supports the expansion of private markets into the affluent retail investor market, uptake of the Eltif since 2015 has been limited. As of the end of 2022, there were only 89 Eltifs across the EU, whether as standalone funds or sub-funds. Notably, approximately half of the growth in assets under management occurred in the same year.

However, all this can change with the revised Eltif regulation: Eltif 2.0.

Simplified investor access to private markets
Transitioning to its enhanced version, Eltif 2.0 retains its core but introduces notable flexibilities and expansions. These mean that the Eltif should become much more attractive to retail investors, distributors and asset managers.

In Eltif 2.0, the commitment to long-term investments remains, albeit reduced to 55%, while the amount of other eligible assets has expanded to 45% –the original regulation had a 70/30 split– thus creating opportunities for a more diverse and liquid portfolio. A major shift comes in its structural design, and the new version of Eltif can be either closed-ended or semi-open-ended.

On the investor and distributor side, investors will find it easier to enter and exit, with the removal of the minimum entry ticket of EUR 10,000 and lighter conditions for early redemptions. The new regulation also provides for the possibility of organised matching mechanisms for redemptions. Because Eltif 2.0 gives retail investors more ability to participate in private markets, there is also the capacity to build a more diverse and balanced portfolio, which financial advisors and distributors will find attractive.

While the original Eltif laid a foundation for long-term investments in Europe and unlocking private market growth to retail investors, Eltif 2.0 takes it a giant step forward. There is, therefore, a great opportunity for investors and their financial advisors to access an asset class that can balance and then benefit their overall portfolio allocation.

Embracing digital and D2C models
In this scenario, commercialisation and efficiency around the distribution of the revamped Eltif is fundamental. However, the current distribution model of all investment funds, in general, is highly intermediated and structured for plain vanilla funds.

Moreover, there is now a need to be closer to the point of sales, whether in a D2C or B2B2C model, as these products remain complex, and more scrutiny is required on suitability requirements and how they are presented to investors. The regulations around data and payments are shifting. In June this year, the European Commission introduced proposals in its financial data access and payments package emphasising digital transformation, secure consumer data sharing and competition.

In addition, one of the key objectives of the 2020 Capital Markets Union action plan was to make the EU an even safer place for citizens to invest in the long term. The Retail Investment Package prioritises consumer interests and empowerment, aiming to bolster trust and confidence in investments within the EU’s capital markets. This is aligned with the action plan’s objective of facilitating private funding for green and digital transitions.

This is where digital distribution and tokenisation can accelerate the growth and adoption of the Eltif.

Not just Eltifs, opportunities for Ltafs
Introduced in 2021, the UK’s Long Term Asset Fund, or Ltaf, has some key similarities (and differences) with Eltif 2.0 and would thus also be ideal candidates for a more modern and fully digital distribution chain.

As in Europe with the Eltif, the FCA in the UK announced new rules in June this year to broaden retail and pension schemes' access to Ltafs. Both Eltifs and Ltafs are designed for professional or retail investors looking to invest in illiquid, long-term assets. They both aim to allow a wider group of people to invest in private equity by enabling smaller sums of money to be channelled into strategies designed for such investment.

Therefore, the trend in the UK and Europe certainly points in one direction: greater access. This means larger numbers of retail investors' market share will need to be serviced. With the current state of the overly complex distribution chain, the most efficient way to do this and thus achieve the promise of Eltifs and Ltafs is a fully digital chain.

Unlocking Eltif potential through digitisation and tokenisation
The digitisation of fund distribution, once slow-moving, is now in full swing. To a certain extent, this transformation focuses on the end investor through a direct-to-consumer (D2C) model. The need for increased efficiency, reduced costs, and improved investor experience drives it.

Digitisation in fund distribution encompasses a range of technologies that streamline operations, enhance transparency, and elevate investor engagement. This entails incorporating advanced data analytics, using artificial intelligence, and implementing automated workflows to minimise manual interventions and errors. Additionally, it facilitates processes such as KYC and AML, easing compliance burdens and enabling funds to prioritise investor service.

Adopting digital channels facilitates direct communication with investors, providing easy access to fund information, performance data and transactions. This shift to digital platforms caters to the growing demand for convenience among investors in an era of instant digital services.

Tokenisation takes this one step further. It has emerged as a powerful tool that aligns seamlessly with the objectives of the Eltif, especially in the realms of accessibility, transparency, and efficiency. Beyond a basic D2C model, tokenisation can deepen efficiencies in a B2B2C model, creating synergies between issuers and distributors. Let us explore these synergies in detail.

Concerning efficiency, tokenisation streamlines the operational facets of fund distribution. From near-instant settlements to removing the existing need for multiple reconciliations across the distribution chain, tokenisation reduces the operational burden, resulting in significant cost reductions for all actors. In short, reducing distribution frictions and costs makes the process easily scalable and more economical.

By working within a decentralised platform, all data is available to actors in the distribution chain in a permissioned way. This offers insights into what is happening all along the distribution chain, thus enhancing transparency in many areas. Of a particular note is that distributors and asset managers can have a clear understanding of their investor base. When you know your investors better, tailoring investment products to their needs becomes a tangible reality.

On the other hand, tokenisation of Eltifs will not solve all problems; it is still a product that requires a certain expertise to commercialise. When it comes to retail fund distribution, the vast majority of business in Europe is driven by a B2B model, with no visibility on the “C”, the end investor. There is a perception that tokenisation will lead to the complete opening up of distribution together with an active secondary market. While this may happen in the very long-term, it remains unlikely at this time. What tokenisation offers is better operations in the B2B2C model and the opportunity to build a truly transformative D2C distribution channel.

Streamlined operations with decentralised platforms
Enhanced connectivity across operational functions is achieved through a decentralised infrastructure, with all actors participating and having an end-to-end view of the entire distribution process.

In digitisation, asset managers can capitalise on white-labelled digital platforms, leveraging new technologies to simplify regulatory requirements during account opening. These advancements ensure continuous monitoring of due diligence, settlement processes, and overall process automation, supporting the seamless onboarding and management of investors at scale.

This means that for fund actors seeking to take advantage of the opportunities presented by Eltif 2.0 and to popularise long-term investments, the chain transformation makes distribution simpler and cheaper and can now be executed more efficiently. Such innovative solutions are already in use for a variety of fund types.

With proven, real-world uses in fund distribution for major players, FundsDLT offers various solutions in the B2B2C and D2C space, including solutions for a fully digital transfer agent. This combination enables enhanced capability to manage investors on a much larger scale.

This article was first published in Funds Europe.