The new European Long-Term Investment Funds Regulation (ELTIF 2.0) has created opportunities to invest in private assets through open-ended funds. In this article, we discuss this innovative regulation and the additional investment opportunities it brings to private credit.
ELTIF 2.0 – A big step towards democratising private asset investing
ELTIF 2.0, which has been applicable in the European Union since 10 January 2024, provides new possibilities to create and distribute funds investing in private credit loans.
This is particularly true for ‘evergreen funds’ accessible to retail investors. One of the most far-reaching and innovative amendments of last year’s legislation is to differentiate between ELTIFs that target professional investors only and those that also target non-professional investors.
In our view, ELTIF 2.0 is a major step forward towards the democratisation of private asset investing for both professional investors and retail clients.
We run a strategy that takes advantage of this regulatory framework. It offers a diversified exposure to private credit markets, with allocations to
- Corporate private debt
- Infrastructure private debt
- Real estate private debt
- Senior debt
- Junior debt.
Being part of the BNP Paribas group means our investment teams are partnering with a leader in European lending, private debt origination and syndication.
Characteristics of a private credit strategy
By adding private credit strategies to their portfolios in place of traditional equity or credit strategies, investors should be able to increase risk-adjusted returns.
Our strategy offers broad access to different sectors of the real economy, each with their own slightly different exposure to the business cycle.
We invest in a broad range of private credit assets, offering exposure to the real economy, through direct investments in corporate debt, and to real assets, through direct investments in infrastructure and real estate debt.
The investment case for private credit
There is a strong investment case for private credit in a world where investors are seeking new sources of returns and diversification from traditional strategies:
- Higher gross yield: private credit can offer a higher gross yield compared to high-yield bonds of the same rating, supported by the yield premium private credit offers
- Lower credit loss: private credit investments include structural features (e.g., covenants) that can provide more downside protection and higher recovery rates than traditional unsecured bonds of the same rating
- Lower volatility: private credit has less price volatility than high-yield bonds, potentially providing more stable returns over the longer term
- Diversification: private credit is less correlated with traditional asset classes such as equity and bonds. It provides diversification by reducing volatility and increasing returns in a traditional portfolio.
The objective is to achieve:
- Higher returns versus bond investments with comparable risk. That means an expected gross return in the range of 3-months Euribor plus 5%-6% (source: BNP Paribas Asset Management, as of January 2025)
- Regular and material income distribution
- Lower risk than other fixed-income strategies aiming for comparable returns, with both a lower probability of credit losses and lower volatility, and with limited duration exposure.
Conclusion
In our view, the regulatory changes that came into force in 2024 broaden significantly the range of investments available to investors. Investing in private credit on a diversified basis can give investors the opportunity to receive a regular and meaningful income.
We see a large and growing opportunity in private credit. However, we believe manager selection remains a critical consideration, including a manager’s potential experience over multiple credit cycles.
Investing in specialised or restricted sectors such as private credit may be subject to a higher-than-average volatility due to a high degree of concentration. There may be greater uncertainty because less information is available. There is less liquidity and possibly greater sensitivity to changes in market conditions. Some private credit sectors offer less security than the majority of international developed public markets. For this reason, services for portfolio transactions, liquidation, and conservation on behalf of funds invested in private credit markets may carry greater risk.
For these reasons, we believe managers must be disciplined in deploying capital, balancing the growing competition and smaller potential yield premiums with the need to account for downside risks. When evaluating the opportunities in the current credit market, investors may benefit from a holistic understanding of the terms and conditions that influence the relative value of private and public credit.
In the search for returns, we believe private credit offers competitive risk-adjusted returns relative to traditional equity and credit strategies.
Disclaimer
This material is issued and has been prepared by a representative of BNP PARIBAS ASSET MANAGEMENT Australia Limited (“BNPP AMAU”) AFSL 223418 ABN 78 008 576 449.
This material is produced for information purposes only and does not constitute:
- An offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or
- Investment advice.
Opinions included in this material constitute the judgement of BNPP AMAU at the time specified and may be subject to change without notice. BNPP AMAU is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.
Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material.
All information referred to in the present document is available on www.bnpparibas-am.com.
