European Long-Term Investment Funds (ELTIF) are expanding after regulatory changes boosted approvals in 2024, signalling growing investor interest, but challenges remain, including high fees, liquidity risks, and the need for asset managers to strengthen their private-market expertise.
Morningstar’s latest report titled ‘ELTIFs Step Into the Spotlight: A new breed of products bridge public and private markets, but investors should tread carefully’ highlights ELTIFs’ growing role after regulatory changes spurred new fund launches, reviving investor interest in these vehicles designed to integrate markets and expand retail access to private assets.
The new framework has introduced open-ended (“evergreen”) structures, making ELTIFs more accessible to a wider range of investors compared to the traditional closed-end format. The updated regulations also allow for a more diluted approach to illiquid markets, meaning many new ELTIFs may not achieve the same high illiquidity premiums that have historically driven private-market returns.
ELTIFs tend to have higher fees than comparable public-market products, with many also charging performance fees that are not always investor-friendly. According to the report, as asset managers face growing competition from low-cost passive funds, ELTIFs offer an opportunity to build higher-margin products.
The report also suggests that a major challenge for advisers and fund selectors is the lack of transparency in key areas such as team composition, portfolio holdings, investment process, and performance.
Managing private assets requires specialised expertise, and asset managers will need to scale up their capabilities to deliver successful ELTIFs. Many traditional firms are acquiring private-market specialists, but integrating these teams may prove difficult.
According to the report, investors must assess an ELTIF’s strategy, liquidity, valuation, and fees to avoid overestimating returns and underestimating risks. Choosing a responsible manager over a trend-driven firm is key.
Morningstar Director of Fixed Income Ratings Mara Dobrescu says: “The convergence of private and public markets is expected to dominate asset management discussions in the coming years. Private markets demand a distinct skill set compared to traditional investments, and asset managers will likely need to scale up their capabilities significantly to deliver successful ELTIF products – which are finally picking up steam following recent regulatory changes.
“For investors, it is crucial to carefully assess the liquidity terms, the underlying strategy, and the track record of the manager when considering an ELTIF investment. For instance, are they entrusting their capital to a good steward with an investor-friendly culture and practices, or a firm that has jumped on the bandwagon of the latest trend without much consideration? Investors also risk overestimating the potential after-fee returns while underestimating the liquidity risks of ELTIFs. While ELTIFs have their advantages, there is much for both investors and fund managers to be thinking about.”
