COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on European Long-term Investment Funds
Date: 2013-06-26
Institutions: European Commission
Subjects: cross-border cooperation, investment company, investment promotion, long-term forecast, single market

EUROPEAN 
COMMISSION 

Brussels, 26.6.2013  
SWD(2013) 231 final 

COMMISSION STAFF WORKING DOCUMENT 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying the document 

Proposal for a  
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
on  

European Long-term Investment Funds 

{COM(2013) 462 final} 
{SWD(2013) 230 final} 

EN 

   EN 

 
 
 
 
  
 
 
1.  INTRODUCTION 

A consequence of the crisis has been to highlight the problem of investors' focus on short 
term  economic  gains  which  comes  at  the  expense  of  the  underlying  purpose  of  capital 
markets which is to finance growth in the real economy. 

There is a need to encourage investors to make longer term commitments to assets such 
as  infrastructure  projects  by  providing  'patient  capital'  rather  than  chasing  short  term 
gains. This kind of longer term investment may not be able to be redeemed for a number 
of  years  but  can  provide  stable  and  predictable  returns.  This  also  benefits  the  real 
economy by providing finance to firms and creating employment. 

Investors with longer term liabilities such as pension funds and insurers may find longer 
term investments attractive. But there are no readily available pooling mechanisms such 
as funds to facilitate this in a way that takes account of the size, scale and duration of the 
commitment to those long term investments that is needed. This is also acts as a barrier 
smaller  investors  such  as  SMEs  and  high  net  worth  individuals  as  well  as  and  retail 
investors. 

This  Impact  Assessment  (IA)  looks  at  whether  the  creation  of  a  cross  border  product 
framework  for  long  term  investments,  so-called  Long-Term  Investment  Funds  (LTIF), 
could  stimulate  institutional  and/or  retail  investor  demand  for  such  assets.  This  work 
compliments  the  Commission  Green  Paper  on  Long  Term  Financing  of  the  European 
Economy. 

2.  PROBLEM DEFINITION 

Problem drivers 

Long term investment in infrastructure projects, SME financing and the like can be done 
through  a  variety  of  financial  instruments,  for  example,  equity  participation  and  loans. 
These instruments often share the common characteristics of being non-transferable and 
illiquid  with  little  or  no  secondary  market.  Investment  in  such  assets  can  require  very 
large up-front commitments of capital which can deter even major institutional investors 
from  acting  alone  given  the  amount  of  money  needed.  Unlike  the  market  for  liquid, 
transferable  assets  such  as  securities,  there  is  no  standard  framework  for  such 
investments.  Some  Member  States  (MS)  provide  national  mechanisms  in  the  form  of 
recognised  investment  vehicles,  others  do  not.  This  fragmentation  prevents  the 
development  of  a  single  market  for  investors  who  wish  to  gain  exposure  to  long-term 
assets which often offer predictable returns but are illiquid by nature. 

Investing in long-term assets, whether via financial instruments or in real assets, entails 
substantial risks when these investments are not properly managed. The first risk is that 
investors are misled as to the nature and risks of the assets they invest in due to the lack 
of  a  harmonized  approach  to  these  assets.  Uncertainty  exists  over  the  identity  of  long-
term assets, their risk and returns profiles and recommended holding periods. The second 
risk is linked to the characteristics of the assets, namely that they are illiquid in nature. 
The  third  risk  is  linked  to  the  fact  that  funds  offering  access  to  these  assets  might  not 
possess  the  relevant  expertise  in  selecting  and  monitoring  assets  and  tailoring  a  fund’s 

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return profile to the needs of potential clients. Due to these reasons, LTI funds have not 
always performed according to plan and investors have sometimes been misled about the 
return that has been promised.  

The problems 

As  a  result  there  is  no  common,  comparable  cross  border  standard  for  what  long  term 
assets or investments are, who they may be suitable for and how they function. This is in 
contrast to the cross border market for liquid assets which benefits from the Undertakings 
in  Collective  Investments  in  Transferable  Securities  (UCITS)  Directive  standardisation 
of  product  rules.  The  EU's  UCITS  fund  market  has  €6,350  billion  of  assets  under 
management. 

These factors have led to fragmentation in the market for long term investment vehicles 
across the  EU.  This has discouraged investors from exploring this market as unlike for 
UCITS there is no common, recognisable and regulated product structure they can have 
confidence  in.  The  Alternative  Investment  Fund  Managers  Directive  (AIFMD)  will 
create an EU passport for managers who wish to offer non-UCITS funds across borders 
shortly. But the AIFMD applies to managers, not the funds they offer and so it does not 
create  product  rules  or  definitions  for  differing  types  of  asset  classes.  It  is  therefore 
unlikely to address the problem identified. Smaller investors face even greater barriers as 
the  AIFMD  does  not  create  a  passport  for  managers  to  offer  cross  border  retail 
investment funds so different national approaches will continue. 

This has led to a range of undesirable outcomes. Costs for managers remain higher than 
they might otherwise be as cross border investment requires them to deal with a range of 
legal and product issues in different MS. Funds are smaller than they might otherwise be 
and  so  the  impact  of  costs  on  any  investment  return  or  yield  is  proportionately  higher. 
Retail  investors  are  unable  to  access  funds  in  other  MS  that  they  are  familiar  with  and 
have confidence in. Costs remain high and the choice of funds is restricted. As a result 
other  smaller  and  retail  investors  are  unable  to  enjoy  the  diversification  benefits  that 
access to long term investments could otherwise bring. 

The real economy is also affected as alternative ways of financing long term growth are 
restricted and so firms continue to rely primarily on bank financing which has moved its 
emphasis on to short term commitments. This restricts the amount of capital firms have 
access to from both institutional and retail investors and so acts as a brake on their ability 
to invest for the long term and create growth and employment for the economy. 

3.  ANALYSIS OF SUBSIDIARITY 

Fund  managers,  investment  targets  and  investors  are  domiciled  throughout  the  Union. 
Because the asset management sector is essentially of a cross border nature, the current 
fragmentation of the LTI market has led this sector to operate below an efficient level. 
National regulatory approaches to addressing this are however inherently limited to the 
Member State in question. Regulating the product profile of an LTI fund at national level 
has  led  to  a  situation  where  many  different  fund  regimes  have  evolved  independently. 
National  action  has  impeded  the  emergence  of  a  Union-wide  internal  market  for  those 
who offer LTI funds to their investors. 

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The creation of a stable cross border mechanism to encourage LTI is desirable and could 
form part of the drive for economic recovery. Long experience with UCITS suggests that 
EU-wide  product  rules  and  requirements  can  prove  to  be  a  highly  successful  way  of 
stimulating investment into the relevant assets.  

Therefore  action  at  European  level  to  create  a  single  market  for  long  term  investment 
funds is needed. 

4.  OBJECTIVES 

The general objectives are to: (1) increase the means for long-term financing across all 
sectors of the economy and (2) increase the coherence of the single market. To do this 
requires three specific objectives are met. These are: (1) enhance economies of scale for 
managers of LTIF, (2) increase the choice and protection for investors interested in them 
and (3) increase investment flows into assets with long-term horizons. 

Achieving this in turn requires two operational objectives are carried out: (1) remove the 
barriers to a single market for funds targeting long term assets which would expand the 
investor base and (2) reduce opportunities for mis-selling of LTI vehicles. 

5.  POLICY OPTIONS 

To  meet  the  two  operational  objectives  the  IA sets out seven policy  options  relating to 
both product rules and different types of investors. These range from taking no action to 
creating  product  rules  for  a  cross  border  LTIF  available  to  both  institutional  and  retail 
investors. Each option is relevant to both operational objectives. 

Option 1  No action 

Option 2  Develop a 'soft' label but not a passport 

Option 3  Allow  UCITS,  which  already  have  a  passport,  some  exposure  to  long  term 

assets 

Option 4  A new fund, the LTIF, would be created with a distinct set of portfolio rules 
relating  to  the  classes  of  long-term  assets  that  are  eligible  for  investments. 
This new LTIF would be open to institutional investors only 

Option 5  Same as option 4 but the fund would be open to High Net Worth Individuals 

(HNWI) as well. 

Option 6  The  LTIF  would  be  open  to  all  investors,  including  retail  investors.  This 
would  entail  stronger  investor  protection  requirements.  To  match  the  long-
term nature of the assets, there would be no redemption rights. 

Option 7  The same as option 6, but including redemption rights, after an initial lock-in, 

for example for three years. 

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6.  ASSESSMENT OF THE IMPACTS OF THE RETAINED OPTIONS 

Option  1  of  taking  no  action  is  not  acceptable  as  it  does  nothing  to  address  the  issues 
identified. 

Option 2 would involve non-legislative measures to encourage the convergence of funds 
targeting long term investments or marketing themselves as long term investment funds. 
This would most likely require the creation of a voluntary product label and code. While 
it would be a low cost option for managers it may only achieve traction if MS choose to 
amend  their  national  rules  to  support  it,  so  it  is  unlikely  to  address  the  problem  of 
fragmentation. 

Option  3  would  allow  a  limited  amount  of  assets  that  are  both  illiquid  and  not 
transferable to be held within a UCITS. This would give retail investors access to long 
terms assets as well as giving funds that are at least partly invested in long term assets a 
passport. However, it would cut across the fundamental UCITS principle that investors 
are able to redeem their investments at any time. This has given investors confidence in 
UCITS. Any change to it risks undermining its success and causing confusion about the 
types of assets UCITS may invest in and the risks inherent in them. A number of asset 
managers have also signalled their objection to such a change as they too are concerned 
it could undermine UCITS' success. 

Option 4 would create a recognisable LTI product capable of being sold to institutional 
investors across the EU via a passport. The rules would be modelled on those in UCITS 
in relation to, for example, eligibility of assets, but would apply to assets that are illiquid 
and  long-term  in  nature.  This  would  not  address  the  problem  that  smaller  and  retail 
investors will continue to be excluded from making such investments so they would not 
be  able  to  diversify  their  portfolios  accordingly  or  contribute  to  the  available  pool  of 
capital. 

Option  5  would  allow  what  are  often  called  high  net  worth  individuals  or  HNWI 
regarded  as  able  to  accept  higher  levels  of  investment  risk  access  to  such  funds. 
Otherwise  it  is  the  same  as  option  4.  While  it  would  have  the  effect  of  widening  the 
available pool of capital and extending to availability of further diversification to more 
investors, it still excludes retail investors from the potential benefits of investing in such 
funds. 

Option 6 would allow funds as defined under option 4 which do not allow redemptions to 
be marketed to retail investors across the EU via a passport. This would allow the widest 
range  of  investor’s  access  to  such  funds  so  maximising  the  potential  pool  of  capital 
available to make such investments. To address investor protection standards needed for 
retail  investors,  the  fund  will  be  subject  to  product  rules  designed  to  ensure  enough 
diversification, address conflicts of interests, increase transparency about costs, and limit 
the  use  of  leverage.  This  inevitably  implies  some  extra  costs.  Greatly  improved  and 
harmonized  product  rules  may  mitigate  risks  of  mis-selling.  This  will  aid  institutional 
investors as well as retail, building confidence in long-term assets. Making the fund take 
a  closed-ended  form  has  the  advantage  of  permitting  investments  in  all  types  of  long-
term assets as the structure better matches the illiquidity profile of these assets. Such a 
solution has the merit of being transparent as to the long-term commitment that investing 
in such assets requires. 

Option  7  is  the  same  as  option  6,  except  that  it  allows  redemption  rights.  Redemption 
rights would be available after a set period, for instance three years, after which investors 

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would have access to their money on a regular basis. While this would reduce the danger 
of  retail  investors  being  locked  in  against  their  interests  it  does  not,  given  the  illiquid 
nature of long-term assets, eliminate it altogether. It would also mean funds would have 
to maintain a liquidity buffer to ensure they are always able to meet redemption requests. 
This  would  reduce  the  proportion  of  illiquid  long  term  assets  held  within  funds,  so 
reducing  the  portfolio  diversification  benefits  they  offer  to  investors  and  cutting  the 
amount of money available for investment in long-term assets. 

Retained option 

On  this  basis,  looking  at  options  1  to  7,  option  6  appears  to  offer  the  greatest 
effectiveness and efficiency in creating a common definition and reducing barriers to a 
flourishing  single  market  for  LTIF.  By  including  retail  investors,  it  will  open  up 
untapped capital sources, and it will stand a stronger chance of addressing fragmentation 
across  national  markets.  Further,  by  permitting  managers  to  market  LTIF  without 
redemption rights, it will allow a faster and potentially deeper take up than option 7 due 
to its flexibility. This option mirrors the existing models that exist in the countries that 
allow investments of retail investors.  

7.  MONITORING AND EVALUATION 

Evaluation  of  any  legislative  initiative  is  a  priority  for  the  Commission.  In  the  case  of 
this  proposed  regulation  the  monitoring  would  relate  to  the  growth  or  otherwise  in  a 
market for EU-wide long term investment funds. Were such a market fail to develop after 
a reasonable time period then further evaluation would be needed to assess whether the 
regulations themselves need to change. 

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