Investing “like the rich”: that's roughly how so-called ELTIFs are marketed. They contain alternative investments such as private equity. Our chief economist Philipp Dobbert explains what lies behind all the buzzwords.
ELTIFs have been heavily promoted for months now, very often in connection with private equity. What's it all about in the first place?
Equity means own capital, or shareholders' capital. So it's about stakes in companies. Stocks are “public equity”, because they're available on public trading venues. “Private equity” refers to non-public holdings, that is, companies that aren't listed on a stock exchange. For a long time, these were reserved above all for institutional investors, for example specialised private equity funds. Anyone who wanted to take part had to bring a lot of money to the table.
That changed in 2024, following the reform of the so-called “European Long-Term Investment Funds”, ELTIFs for short. These are investment vehicles through which, these days, even private investors can relatively easily invest in private equity, among other things. The number of products has grown sharply of late. The range of what's inside ELTIFs does go beyond private equity, but the buzzword makes for very effective product marketing.
It's said that private equity can deliver higher returns than stocks …
As a blanket statement, that isn't true. Even if some people in the industry like to claim it. For one thing, when comparing performance you can always pick the time period so that it fits the desired conclusion. For another, the methods for calculating returns in private equity are very complicated and varied.
With stocks, prices are quoted continuously, so the performance is transparent. When it comes to valuing private equity, there's basically always a certain amount of room for interpretation. So whenever you hear something about the performance of private equity, you always have to ask yourself: are these actually returns that reached the investors? Once you factor in the sometimes astronomical costs, the returns are, by and large, not significantly higher than with a broadly diversified equity investment. Even if individual private equity funds occasionally stand out with their performance: there are no outstanding returns just because a product carries the “private equity” label. But the risks are far greater in any case.
I take on risks in the equity market too. Why is private equity riskier?
How big the risk is in the equity market depends on the investment strategy. Anyone who wants to avoid unnecessary risks relies on the broadest possible diversification, steering clear of all speculation and forecasts. With our global ETF portfolio, we aim for the long-term average returns of the world's equity markets. A strategy like that runs completely counter to the private equity approach. Because that revolves around a narrow and highly speculative selection of companies. And that selection usually relates to a specific corporate situation.
At one end of the spectrum is venture capital. That's risk capital for companies that are only just coming into being. At the other end is “distressed capital”, that is, capital for companies in crisis. Either way, the bets are highly risky. Individual holdings can fail completely, and that happens often. And private equity funds hardly diversify at all, investing perhaps in 10 or 20 often quite similar companies. Even funds of funds, which invest in several private equity funds, rarely manage to cross a threshold of 1,000 companies. For comparison: through ETFs, our global portfolio holds stakes in around 8,000 stocks.
Does what applies to private equity funds also apply to ELTIFs?
The structures differ in part, but they have many parallels. ELTIFs can have quite different focuses. Alongside private equity, infrastructure, for example. Or private debt. That refers to private loans outside the banking sector.
The costs are especially high with ELTIFs that focus on private equity. The ongoing management fees are usually between 1.25 and 2.5 percent. On top of that, there are often front-end loads of up to 5 percent. And performance fees of 15 to 20 percent, if the return exceeds a certain threshold. And the costs aren't the only hurdle.
What other hurdles are there?
Closed-end ELTIFs have fixed terms of up to 30 years. Even with open-ended ones, you're generally bound by certain minimum holding periods and notice periods. To make it possible to return units, these funds have to keep a thick liquidity buffer on hand. After all, the funds can't get out of their long-term holdings at short notice.
But if, say, 20 percent of the capital isn't invested in order to enable units to be returned as promptly as possible, then a not insignificant portion of the capital generates no return. Very high costs, doubtful return prospects and very high risks, not a good combination.
It's often said that with ELTIFs you can invest “like the rich”. So why do they put their money into private equity?
For institutional investors, it's usually about cushioning price fluctuations in other parts of the portfolio. With stocks, the value changes continuously along with the price quotes. With private equity, the value of the individual holdings is only rarely determined, and then on the basis of internal estimates. So, purely mathematically, there's less volatility.
The risk nevertheless remains high. But it hardly carries any weight in those enormous portfolios. If you have, say, investable assets of €100 billion, you can put €50 million into private equity and then risk only 0.05 percent of the portfolio. If you want to invest €10,000 and take your cue from that, the private equity share would be €5. So it hardly makes sense to simply imitate such strategies.
Even though the benefit is questionable, more and more ELTIFs are currently being launched …
I suspect that the flood of products has at least partly to do with the terms of “classic” private equity funds. As a rule, these are between 10 and 12 years. Usually with an option to extend by 2 to 3 years. By then, all holdings are supposed to be wound up, so that the investors can be paid out.
But for various reasons, private equity exits have been difficult in recent years. To this day, you can still see the after-effects of the coronavirus pandemic and the interest-rate turnaround, but also of current geopolitical tensions. In this situation, the new ELTIFs come at just the right moment for many private equity funds: they can pass the holdings on to them and thereby solve their exit problem.
What does that mean for investors?
That they're probably investing in very highly valued company holdings, with doubtful prospects of success. Whether individual ELTIFs are worth an investment is something everyone has to decide for themselves. For building wealth systematically, though, a global ETF portfolio offers a far better ratio of return potential to risk, and at much more favourable terms.
You can find out more about building wealth with our ETF portfolios here.
