This year has been a pivotal one for the development of European Long-Term Investment Funds in Luxembourg. Already chosen as the domicile for more than half of all ELTIFs established so far across Europe, the grand duchy is set to be a prime beneficiary following revised rules agreed by the EU in March and due to come into force in January 2024, says Silke Bernard, Linklaters LLP Luxembourg, Investment Funds Partner and Global Practice Head for Investment Funds.

The changes, which include the introduction of a simplified, more flexible investment structure and other revisions sought by the fund industry, are intended to open up alternative investments, particularly in infrastructure, real estate and other long-term assets, to Europe's retail investment market.

High-net-worth investors are eager to embrace diversification into new asset classes with high return potential, especially after a decade of low rates on fixed-income products and recent turbulence in equity markets. 

The package of measures dubbed ELTIF 2.0 now removes many of the restrictions that prevented numerous wealthy investors from including ELTIFs in their portfolios and deterred asset managers from tailoring their offerings for the non-institutional market.

Urgency of the climate transition to drive investment 

This development is even more important as the demands of the climate transition call for investment into a wider range of renewable energy and other sustainability-linked infrastructure. The EU and national governments are backing this strategy with a range of funding programmes and other incentives, but private investors' capital represents a critical source of financing for what will continue to be a central economic priority over the coming decades.

At the beginning of this year, Luxembourg had already established itself as Europe's primary domicile and servicing hub for ELTIFs, home to 48 out of a total of 84 structures with almost all of those aimed at a pan-European market.

Thanks to the country's ecosystem of specialised fund service providers, from administrators and depositaries to lawyers and auditors, as well as a comprehensive range of fund and corporate structures covering the needs of all types of investors, it is well-positioned to consolidate its market dominance in the coming years as the sustainability transition intensifies and the ELTIF 2.0 regime starts to fulfil its potential.

Wider opportunities for retail investors 

In July 2023, the government unveiled legislation to encourage both developments by entirely removing the annual subscription tax on fund assets for Luxembourg ELTIFs. Excluding ELTIFs, such tax is normally applied at a standard rate of 0.05%, although the rate is reduced for example, when investing in sustainable assets and certain other fund types.

This step underlines the country's priorities in mobilising retail investments and providing an additional incentive to non-institutional investors to embrace long-term asset classes and strategies. The change comes as part of a broader modernisation of Luxembourg's fund legislation that also includes lowering the general minimum investment in alternative funds for high-net-worth investors.

The EU's changes to the ELTIF rules expand the scope of eligible assets under the regime and make it easier for individual investors to invest in strategies that may require capital to be locked up for several years. They also introduce greater flexibility for funds by removing the minimum investment in real assets and making assets in non-EU countries eligible under certain conditions.

Real asset opportunities that have been largely restricted to professional investors are now within the reach of wealth advisers' clients, ranging from educational, sports and research facilities to senior, student and social housing, through a structure that incorporates the investor protection provisions applicable to regulated funds in Luxembourg. 

Luxembourg looks to the future of ELTIFs 

Luxembourg has not become Europe's leading fund centre (and second in the world after the United States) by chance. It has developed a broad range of products, structures and regulatory regimes designed to cater to all asset managers and investors - especially, over the past decade, in offering regulated alternative investments.

The changes to the ELTIF regime have received an enthusiastic welcome in the grand duchy for the opportunity they bring in offering a more diverse range of assets to wealthy investors, alongside pure retail clients and institutions. Luxembourg ELTIFs are set to play their part in developing the sustainable infrastructure on which the world's future economy will be built.

By Silke Bernard, Linklaters LLP Luxembourg, Investment Funds Partner and Global Practice Head for Investment Funds.