The Regulation of European Long-Term Investment Funds in France

This post comes to us from Vincent Hatton (Avocat at the Paris bar, partner) and Vincent Danton (Avocat at the Paris bar, senior associate) of Herbert Smith Freehills.

The EU Regulation 2015/760 of 29 April 2015 on European long-term investment funds (the 'ELTIF Regulation') has been in force since 9 December 2015. ELTIF is a label for alternative investment funds ('AIF') whose purpose is to provide financing to companies that need long term financing.

French law n°2015-1786 of 29 December 2015 has introduced the possibility for ELTIFs to grant loans to French companies. Other French implementing texts will be enacted shortly.

1. ELTIF at a glance

In a nutshell, ELTIF (or 'FEILT' in French) is a label only available to AIFs that:

• will be subject to both the ELTIF Regulation and the relevant AIF national applicable rules; and
• shall invest at least 70% of their capital in long term debt instruments, equity or quasi-equity instruments.

Several types of French funds could obtain the 'ELTIF label'. Similarly to French fonds de prêt à l'économie, the most appropriate vehicle in France for ELTIFs will probably be French securitisation vehicles.

2. Asset side

The aim of ELTIFs is to invest in assets that are by nature illiquid. ELTIFs shall invest at least 70% of their capital in:

• equity or debt instruments issued by eligible companies;
• eligible assets in which UCITS may invest (including units or shares of another ELTIF);
• loans granted to eligible companies; and
• 'tangible' assets with a value of at least Euro 10,000,000.

Under the ELTIF Regulation, an 'eligible company' is:

• a company that:
  • is not admitted to trading on a regulated market; or
  • is admitted to trading on a regulated market and whose capitalisation shall not be more than Euro 500,000,000;
• a company that is located in a EU Member State or in a third country not listed by FAFT; or
• a financial company that finances eligible companies or eligible assets of at least Euro 10,000,000.

Eligible companies are accordingly not limited to EU companies. States, municipalities and public companies are also eligible entities for financing provided by ELTIFs.

3. A wide audience: retail investors and professional investors

Investments in ELTIFs are potentially available to both professional and retail investors.

Professional investors include professional clients such as institutional investors. The capital requirement to invest in ELTIFs (i.e. the amount of capital that EU insurance companies must hold to invest in ELTIFs) will be a major incentive for insurance companies but the European provisions shall still be enacted in this respect.

The ELTIF Regulation provides a 'minimum entry ticket' of Euro 10,000 for retail investors investing in an ELTIF when the investment capabilities of such an investor do not exceed Euro 500,000, and provided further that such investment does not exceed 10% of the financial portfolio of such an investor.

4. Next steps

French law no. °2015-1786 of 29 December 2015 has exempted ELTIFs from the so-called French banking monopoly rules pursuant to which only duly licensed credit institutions or financial companies may grant loans on a regular basis.

Other implementing texts shall be enacted, and suggestions have been made by practitioners to the French AMF (the market authority in France) through a public consultation. The AMF has required some elements that are not in the ELTIF Regulation such as (i) the limitation to lend only to non-financial companies when loans granted represent more than 10% of the net assets of the fund and (ii) the restriction to transfer loans once originated when loans granted represent more than 10% of the net assets of the fund.

Based on the proposals from the AMF, the French government has prepared a draft decree that shall establish a revised legal framework allowing investment funds to originate loans in France. It is intended that this decree (which should be published in the beginning of Summer 2016) will require management companies of ELTIFs to have appropriate loan origination teams with expertise to audit the relevant borrowers and to analyse the legal framework and operational risks involved. The asset managers will also need to monitor the performance of each loan on a quarterly basis to assess its value.

A point left open is to which extent ELTIFs shall be restricted to assigning loans that they have originated. The AMF wishes to avoid the 'originate to distribute' model. Practitioners have emphasised that the AMF should not add burdensome local regulation to the ELTIF Regulation that would make France an unattractive jurisdiction for investment funds. Thus, an appropriate balance must be found.