Eltif 2.0: a new passport to multi private assets for clients

Individuals can make the most of exposure to private assets in terms of potential performance and diversification by combining their investments in infrastructure, private debt, real estate and private equity. Moreover, access is now possible via a single, multi private asset evergreen fund

People around the world are living longer. According to the World Health Organization, the proportion of people aged 60 and over in the global population will nearly double in 2050, rising from 12% in 2015 to 22%. Crucially, the need to save more for retirement and maintain higher returns rises with increased life expectancy.

Faced with this challenge, pension funds and institutional investors have long turned to private assets: private equity, real estate, private debt, and infrastructure. The hope has been to realise higher returns in exchange for lower liquidity, while also diversifying their portfolios to help them navigate different phases of economic cycles.

And the opportunity set is evolving. Private assets are now gaining popularity among private investors too: according to Bain, “individual investors hold roughly half of all global wealth but account for a much smaller share of private capital AUM”. Moreover, Bain says that demand for private assets from individuals could triple over the next ten years, demonstrating the popularity of the retailisation of private assets.

Global wealth by investor type, 2022

Sources: Prequin, GlobalData, Bain analysis

The financial industry, specifically regulators and asset management companies, are striving to support this retailisation – also known as ‘democratization’ – of private assets, primarily through the promotion of Alternative Investment Funds (AIFs). The regulation on European Long-Term Investment Funds (ELTIF), revised in January 2024, plays a significant role in this. The ELTIF label was designed to be to AIFs what the UCITS label was to listed funds: a facilitator and accelerator for the pan-European distribution of funds to individuals within the European Union, regardless of the domiciliation of the fund.

Frédéric Drouin, Senior Product Developer at Natixis Investment Managers, said: ”Until now not all private asset classes were necessarily accessible to individual clients. The ELTIF 2.0 label is a great innovation.  Retail investors now have the opportunity to gain exposure to private debt and infrastructure. They did not previously have an appropriate legal vehicle for doing so. French individuals could gain exposure to private equity via FCPRs or real estate via OPCIs, but access to private debt and infrastructure was reserved for just one segment of the population: professional clients.”

It has not all been plain sailing. End clients need support in their efforts as they are not equally familiar with the risks and benefits of private assets, while distributors are not always accustomed to promoting them beyond high net worth individuals. And while the potential benefits are real, the associated risks should not be overlooked, including longer investment horizons, sometimes complex valuations, lower liquidity, lock-up periods of several years before the first redemptions can occur, and so on.

Private investors can choose to expose themselves to a single segment – private equity (PE) rather than private debt, for example – which theoretically adds limited diversification to a portfolio. But recent context has proven that certain segments, such as PE or real estate, were not completely uncorrelated from the macroeconomic context. The return of inflation and the sudden rise in interest rates triggered by the war in Ukraine in 2022, for instance, negatively impacted these two asset classes.

Meanwhile, the rise in borrowing rates has slowed the growth of the real estate market. And small and medium-sized enterprises in which closed private equity funds invest are sensitive to economic cycles. So, a broader private assets exposure could provide better diversification benefits.

Multiple assets for maximum returns

While institutional investors have the expertise and financial means to diversify and manage their exposure to private assets, often investing in different closed funds across infrastructure, private debt, private equity, and real estate, this is not the case for individual investors. Commonly, this is because less sophisticated investors lack the time, expertise, or financial means to manage their exposure to private assets according to market cycle developments.

However, this barrier could soon be overcome. A solution now exists that allows individuals to invest across all segments of private assets through a fund of funds structure. In other words, an investment fund that invest its assets in several individual closed-end funds.

And because fund of funds are usually more broadly diversified than other types of funds, they are often used as vehicles for implementing asset allocation decisions. “By allocating to different private asset classes, you can increase the diversification potential of your portfolio and the number of performance drivers while mitigating the risk. The allocation can be strongly diversified by type of asset, sub-strategy, General Partner, geography and vintage,” said Philippe Faget, Head of Private Assets at Vega Investment Solutions.

Naturally, finding the appropriate expertise is essential – especially given the varying degrees of sensitivity of private assets to economic cycles and the variable correlations among private assets. Relying on an experienced manager that can navigate their exposure based on market views and economic cycle developments allows for maximizing the potential for returns and diversification of private assets.

Faget added:” Private assets are sought after by investors for their decorrelation virtues, and multi private assets adaptative allocation helps them navigate over the long term within business and market cycles.”

A portfolio built with multiple private asset classes can offer an even lower correlation – with a traditional portfolio – than a portfolio consisting of only one single private asset class. This can be explained by the very low correlation observed between different private assets classes, as illustrated in the matrix below.

Correlation matrix

Sources: Cambridge Associates, VEGA-IS, as of March 2025

“Benefiting from extremely low levels of correlation between private asset classes makes it possible to considerably reduce the risk of a multi private assets portfolio while capturing the liquidity premiums of each of these asset classes”, said Joseph Gawer, Private Assets Quantitative & Financial Engineer at Vega Investment Solutions.

Additionally, they must determine the right entry and exit points for the underlying closed funds. As can be seen below, the blue line represents the evolution of the median net Internal Rate of Return (IRR) of European private equity funds depending on their vintage. An investor allocating to private equity in 2006, before the Great Financial Crisis (GFC), would have seen an IRR around 8%.

Internal Rate of Return (IRR) of European private equity funds

Source: Cambridge Associates, VEGA-IS, as of Q2 2022

That is, generally speaking, a satisfactory level of return. However, investors allocating after the GFC vintages would have been rewarded with nearly double that level of IRR.

Faget continued: “It shows the sensitivity of private assets to the business cycle. The entry point is very important: you need to know where you are in the economic cycle, which is why we have an experienced team focused on developing forward-looking economic views.”

After that, investors face the task of building a private asset portfolio that is genuinely diversified across private asset classes over time. This portfolio must be structured to respond to the target risk levels of investors, investment horizon and their individual liquidity needs.

Access before exit

One might think that this is already a lot. But meeting all these criteria is not enough to guarantee the success of an evergreen fund.

Accessibility proves to be as important as the quality of management. Obtaining the ELTIF label is a necessary but not sufficient condition for the distribution of the AIF. But before being able to offer their fund to individual clients, the manager must overcome numerous obstacles.

One of these is that they must rely on a distributor experienced in launching semi-liquid funds, with a true understanding of the individual client base and a thorough knowledge of the operational, regulatory, and tax specifics of the distribution country.

The country where the fund is domiciled also matters. “International investors generally favour Luxembourg funds, as they are well-acquainted with their functioning. However, the taxation applied may vary based on their nationality,” explained Drouin.

Finally, distributing an alternative fund to individual clients takes time. Laurence David, Senior Product Developer at Natixis Investment Managers, said: “It requires establishing agreements with distribution platforms and getting the fund referenced. Having experience in the distribution of UCITS funds to individual clients helps flatten the learning curve necessary for launching evergreen funds.”

Evergreen means liquidity

The success of an evergreen fund depends on a seasoned team of financial engineers, lawyers, and solid operational handling of capital calls. Individual clients expect the same simplicity in their subscription or redemption processes for non-listed funds as for listed funds.

Meeting this expectation requires very careful management of the fund's liquidity by the manager to satisfy redemption requests. The manager draws from the cash reserve or the distribution products of the underlying funds to meet redemption requests.

The ELTIF 2 regulation has increased the potential size of this cash reserve compared to ELTIF 1, with the minimum investment in non-listed assets dropping from 70% to 55%. David commented: “Liquidity is the key issue. The manager can ensure it by increasing the size of the liquidity reserve, which may impact the fund's potential performance, or by instituting a longer notice period, which alleviates liquidity constraints. The frequency of net asset value calculations determines the fund's degree of liquidity. These are some of the tools available to the manager to optimize the liquidity-performance trade-off of the fund.”

The ELTIF 2 label, by allowing the fund of funds structure that was prohibited under ELTIF 1, has provided greater flexibility for the fund manager. And it is indeed easier to exit an underlying closed fund than to sell direct holdings.

Of course, investors must be realistic. Gawer commented “The liquidity of an evergreen fund is not the same as that of a listed fund. Nevertheless, the multi private assets approach offers resilient liquidity generation from uncorrelated private asset classes. On top of that, the ability to adjust the distributions recycling rate between liquid and non-liquid assets depending on our macro views is essentials in terms of liquidity management.”

Nevertheless, we’re at the intersection of opportunity and transformation in private assets. Despite geopolitical tensions and the potential for policy shifts in key economies, the combination of high risk-adjusted returns and the flexibility to navigate an environment characterised by environmental, demographic, technological and industrial transitions, makes private markets a door that will be increasingly hard not to open in 2025.

Written in March 2025