By Vasantha Rajasooriyar, Head of Technical Advisory
Private markets in general, and venture capital and private equity in particular, have historically shown high risk-adjusted returns over the long term. Seeking to broaden access to these products, the FCA introduced a new authorised fund regime in 2021 for investing in long-term assets. Access was broadened to retail investors in 2023, subject to a number of measures designed to reduce the risk of harm to those investors, making LTAFs an exciting opportunity for a larger segment of the investor base.
In this post, we’ll discuss the impact and ramifications of long-term asset funds (LTAFs) as a restricted mass market investment (RMMI).
Setting the scene: the rationale for LTAFs
Access to long-term and less liquid assets such as property, venture capital, infrastructure, and private equity has been available through unit trusts, open-ended investment companies (OEICs), and investment trusts for many years.
However, retail investor experiences have been mixed—particularly during crises like the credit crunch, Brexit, and the Woodford fund scheme. These events highlighted the inadequacies of open-ended structures in handling large redemptions, market moves, or changes in liquidity under stressed conditions.
Investors usually prefer the comfort of trading at Net Asset Value (NAV), leading to a preference for fund structures inappropriate for illiquid assets. In general, open-ended structures that trade at NAV have anticipated limited redemption applications over any period, assuming favourable market conditions.
Despite the inherent uncertainty around the exit price relative to NAV, which can be exacerbated at times of uncertainty or when certain asset classes are out of favour, investment trusts often offer greater liquidity than the underlying portfolios, which is sufficient for most investors (except the largest institutional investors).
Most institutional investors have used structures such as limited partnerships and other closed-end structures with a finite lifespan to invest in long-term assets. Generally, these structures were only suitable for the wealthiest individuals and institutions.
Introducing LTAFs
LTAFs are designed to facilitate access to long-term, less liquid assets for a broader investor base, including retail investors. They provide a higher level of investor protection than was previously available for long-term assets, aligning the liquidity of the asset base with the redemption frequency through liquidity management tools.
As outlined in COLL 15, the FCA allows LTAFs to invest in a wide range of assets, ranging from real estate and infrastructure to venture capital, private equity, and private debt. All authorised funds must be open-ended so investors can exit at a price ‘related to’ NAV, so fully closed-end LTAFs are not currently available.
Available structures for LTAFs include:
- An Investment Company with Variable Capital (ICVC)
- An Authorised Contractual Schemes (ACS)
- An Authorised Unit Trust Scheme (AUT)
In addition to professional investors, LTAFs allow a broader range of retail investors who satisfy the FCA’s requirements to receive promotions for LTAFs and invest in them.
The FCA’s stance on LTAFs
After a cautious announcement in 2021, the FCA expanded access to LTAFs in 2023 with policy statement PS 23/7, which broadened retail and pensions access. This change extended distribution to mass-market retail investors, self-select DC pension schemes, and self-invested personal pensions (SIPPs). In addition, unadvised retail investors must confirm that their exposure to LTAFs is limited to 10% of their investable assets.
In essence, the FCA seeks to reduce the chance that retail investors might invest in an LTAF without thoroughly understanding the risks. PS 23/7 revised some of the original proposals, amending risk warnings to emphasise liquidity risk. Additional retail investor protections include full engagement with unitholders about proposed significant changes to the fund, including changes to feeder LTAFs. Regular investor updates are also required in the event of a suspension of dealing.
The revisions also reversed some fund-of-fund exposure limits and third-party valuation rules that had previously been set. The FCA now allows a non-UCITS retail scheme (NURS) FAIF to invest more than 50% of its scheme property in LTAFs, provided it meets certain conditions.
The impact of LTAFs
Investors in LTAFs are directly exposed to the underlying liquidity of the portfolios, with a high percentage of portfolios expected to consist of unlisted securities and assets.
While strict third-party valuation rules were originally proposed, the FCA revised its position based on feedback to CP 22/14, modifying requirements to be in line with NURS valuation guidelines. The FCA allows fund managers flexibility with long notice periods, minimum holding periods, in-kind redemptions, and dilution levies.
LTAFs also have greater borrowing power at 30% compared to NURS’s 10% and require full disclosure of costs and charges, equivalent to UCITS and NURS. The FCA also requires transparency with quarterly reports on investments, transactions, and material developments, making LTAFs a viable option for savvy retail investors with a long investment horizon.
Contact our team today to learn more about LTAFs and how IQ-EQ can help.
