Be Prepared: the Long-Term Asset Fund

27 July 2021

We now have a welcomed indication from the Financial Conduct Authority on key elements for launching and operating a Long-Term Asset Fund (LTAF). This will facilitate the UK Chancellor’s ambition that UK legislation will be in place so the first LTAF could launched in 2021.

The LTAF would make it far easier for investors – including those in defined contribution pension plans – to allocate their money to real estate, private equity, infrastructure and other productive assets not normally available to non-professionals. Current proposals envisage at least 50% of the fund in long-term, illiquid assets, which can include loans.

It aims to promote the kind of long-term investment the UK needs if we are to ‘build back better’, with more sustainable and green technologies and buildings, levelling up the economy and creating jobs. FCA chief executive Nikhil Rathi has underlined this, saying: “It is important for overall economic growth that the financial system supports investment that may take time to deliver a return.”

The LTAF also aims to solve the illiquidity mismatch that occurs today when open-ended funds invest in illiquid assets.

What is a Long-Term Asset Fund? The LTAF will allow broader access to productive assets, including real estate, private equity and infrastructure, which are not traded on liquid, public markets. LTAF is designed to provide more diversification for DC pension savers and investors while providing additional investment in the UK economy.

Who needs to prepare?

Asset managers with experience in managing illiquid, long-term assets
Depositaries
Potential investors in long-term asset funds
Investment advisers and private wealth managers
Insurers who write unit-linked insurance business
Fund distributors

Given the target market for the new LTAF regime, it stands to reason that the FCA proposes “rules to secure an appropriate level of consumer protection and to address specific risks related to investments in illiquid assets”.

There is a good chance LTAFs will attract substantial investments, especially from the ever-growing DC pension schemes, two-thirds of which, according to the Department of Works and Pensions, do not invest in illiquid assets at all. Putting those funds to productive use to drive our post-COVID recovery would certainly be a good thing, as would giving these pension funds easier access to illiquid assets, which could yield higher returns than public markets. The LTAF implementing legislation is expected to be up and running before the end of the year.

Given the potential combination of strong fund flows and tax efficiency, it’s no surprise that our clients have already expressed considerable interest in looking to launch and operate LTAFs.

Here are some of the critical areas which you will need to focus on when launching an LTAF:

Distribution and Fees
Governance

Our global compliance solutions team provide regular updates to keep you informed, but you can also contact us to find out how the LTAF and other reforms envisaged by the UK Funds Review might enhance your UK fund offering.