The UK Government and the FCA have given strong impetus to the creation of a new UK fund vehicle, the Long Term Asset Fund or LTAF. The LTAF seeks to solve three problems.
First, ordinary investors are largely unable to access the higher investment returns connected with alternative assets, such as private equity, private debt, and infrastructure. This means lower levels of diversification and investment returns in portfolios than might otherwise be the case. In particular, Defined Contribution (DC) pensions schemes face a demographic time bomb because of their (on average) rapidly ageing and longer living scheme members. This demands that DC scheme trustees find innovative ways to grow their scheme members’ retirement income, and in an environment of chronically low interest rates. DC schemes are increasing their investments in alternative assets, according to the Pensions Policy Institute, but policymakers are keen to quicken the pace.
Second, there have been several high-profile cases of open-ended funds invested in illiquid assets being gated or suspended, including the Woodford Equity Income Fund and several UK real estate funds. Some have criticised regulators for leaving retail investors unable to redeem their money on demand, and perhaps with little understanding of the possibility of being locked in. The FCA want to ensure that similar situations do not happen again.
Finally, as the UK emerges from the pandemic and from Brexit, and with a Government mandate to ‘level up’ regional disparities and a desire to ‘build back greener’ ahead of hosting the UN’s climate conference, the Government wishes to find innovative ways to finance long-term, sustainable economic growth.
The LTAF is proposed to be a solution to each of these problems. So, what is it?
The LTAF is an open-ended FCA-authorised fund vehicle. DC pension schemes are envisaged to be the target investor base, given the large amounts of long-term capital that those schemes could potentially deploy. The LTAF is unrestricted in terms of its investments, albeit with at least half of its investments in longer-term assets, and with reasonably flexible rules around risk management.
The clincher is that the LTAF will not be allowed to be daily dealing, but it will have flexible liquidity management terms. The LTAF will have dealing windows that are aligned with the liquidity of its holdings. It must have redemptions that are no frequent than monthly and with a minimum 90-day notice period.
Given the involvement of retail investors, the LTAF will be subject to strict governance and transparency standards. The FCA wishes to ensure that managers, depositaries, and external valuers are held to high standards, and that the fund’s investors (or rather, their trustees and advisers) receive adequate information.
The LTAF will go live on 15 November, and the FCA has asked interested managers to contact them before submitting an application.
Who is this new vehicle likely to appeal to?
Managers will welcome the opportunity to grow their assets under management. Although the expertise required to manage alternative investments, and the strict regulatory standards that will be applied, mean that at the outset the LTAF might only appeal to those managers and service companies that are well-placed to take advantage of the opportunities provided by the LTAF.
DC schemes serve to gain from an easier means to access better returns for their scheme members. However, there are operational and regulatory issues to be resolved. Moreover, some DC scheme trustees adopt a conservative approach and could be reluctant to move into new fund vehicles and asset classes that they perceive to be riskier than their current investments.
Policymakers recognise these challenges. The Prime Minister and the Chancellor published an open letter to asset owners, encouraging their participation in the LTAF. It is hoped that some technical difficulties, such as resolving the treatment of private equity-type fee structures within the DC charge cap, will be resolved soon.
The FCA has helpfully made the LTAF available to more sophisticated, advised retail investors that have sufficient risk appetite. Next year, the FCA will consider further broadening retail access. Wealth managers will welcome the increased options for their clients.
It remains to be seen whether the LTAF will live up to its expectations. However, for some managers and DC schemes that are willing and able to take the plunge into alternative assets, there are substantial opportunities for growth.
With thanks, Guest Insight article contributed by, Gavin Haran, Head of Policy for Asset Management, Macfarlanes LLP, www.macfarlanes.com
