Is the New Irish ELTIF a Good Vehicle for Private Credit?

The introduction of ELTIF 2.0, and the broad range of investment strategies and eligible investments which ELTIFs can now pursue, is expected to be a game-changer for the private credit industry in Ireland.

The ELTIF (or European long-term investment fund) framework was originally adopted in 2015 with the goal of providing long term finance to the real economy (including in unlisted companies, listed SMEs and infrastructure projects), however its initial iteration had limited success due to a number of different factors, including, but not limited to, restrictive rules on eligible investments.

Now, ELTIFs, particularly those targeted at professional investors, are subject to very few investment restrictions with professional investor ELTIFs (“P-ELTIFs”) only needing to invest 55% of their capital in “eligible investment assets”, and being subject to a borrowing limit of 100% of the net asset value of the ELTIF.

In further good news for private credit managers, Irish ELTIFs are also not subject to any of the local rules or restrictions that apply to other Irish funds that wish to originate loans. This is expected to increase the rate of growth of the private credit industry in Ireland which, pre-ELTIF 2.0, has been slower than that of other jurisdictions due to the additional structuring considerations arising from such local rules.

The universe of ELTIF eligible investment assets is a good fit for a traditional private credit strategy as “eligible investment assets” includes debt instruments issued by a qualifying portfolio undertaking (“QPU”) and loans granted by the ELTIF to a QPU¹, as well as other categories of assets such as equity / quasi-equity issued by a QPU, other European investment funds, real assets, certain simple, transparent and standard (“STS”) securitizations and European green bonds. ELTIFs may also invest in UCITS eligible investments². The type of entity that can constitute a QPU is similarly broad and suitable for traditional private credit strategies. It encompasses entities established in any jurisdiction (excluding AML high risk and non-cooperative tax jurisdictions), provided that they (a) are not admitted to trading, (b) are admitted to trading but have a maximum market capitalization of no more than EUR1.5bn or (c) are an EU Regulated entity³ authorized in the last 5 years.

In addition to P-ELTIFs providing an exciting new vehicle for private credit, the ELTIF offers private credit managers the opportunity to broaden their investor base and target retail and high net worth investors by establishing private credit ELTIFs that may be marketed across the EU to these categories of investors (though certain diversification rules will apply to ELTIFs offered to retail investors). The ELTIF also offers managers a pan-European marketing passport for their private credit ELTIFs, for marketing to both retail and professional investors, allowing private credit managers to efficiently access and sell their ELTIF throughout Europe.

Interestingly, the view that the Irish ELTIF will be a good fit for private credit funds is emphasized by the fact that since the Irish ELTIF became available in March, more ELTIFs have been launched in Ireland with private credit strategies than any other investment strategy. Watch this space.