The Financial Conduct Authority (FCA) is consulting on creating a new category of investment fund designed to allow investors to invest efficiently in long-term, illiquid assets.
These new long-term asset funds (LTAF) would allow investors to invest more confidently in less liquid assets.
LTAFs would be open-ended, much like existing unit trusts and OEICs. They would allow investment in venture capital, private equity, private debt, real estate and infrastructure; asset classes often called ‘productive finance’.
Illiquid investment assets can offer attractive long-term returns to investors but involve more significant risks due to their lower levels of liquidity.
If the FCA successfully creates the LTAF category, businesses and infrastructure projects would gain more access to long-term capital to support investment and broader economic growth.
Rishi Sunak, Chancellor of the Exchequer, first committed to creating Long-Term Assets Funds during his statement to Parliament on the Financial Services Bill last November, saying he wanted them launched within a year.
While investors can already access illiquid assets through closed-ended fund structures, or through private investment, some investors prefer using open-ended funds that present more opportunities to put money in or take money out at the net asset value, instead of the current share price.
However, as seen recently with some open-ended property funds, combining illiquid assets with open-ended funds can create redemption problems if there is a rush for the exit.
As part of its consultation, the FCA is proposing that LTAFs have longer redemption periods, high levels of disclosure, and specific liquidity management and governance features.
As well as being available to experienced retail investors, LTAFs would also be designed for defined contribution pension schemes, depending on their investment time horizon and risk appetite.
According to a recent survey commissioned by the Department for Work and Pensions, two-thirds of these pension schemes do not currently invest in illiquid assets. The remaining third invest up to 7% of their scheme assets in productive finance.
Nikhil Rathi, Chief Executive of the FCA, said:
“It is important for overall economic growth that the financial system supports investment that may take time to deliver a return. This is in addition to the potential benefit to investors themselves. We think our proposals would enable the establishment of authorised funds that are appropriate for both professional investors and sophisticated retail investors that want this type of investment risk and opportunity.
This new type of fund may also be more attractive to DC pension schemes that have long investment horizons and who under current fund structures, find it difficult to invest in these types of assets.
Nevertheless, it is important that the LTAF commands the confidence of target investor groups and can meet their needs. We therefore propose rules to secure an appropriate level of consumer protection and to address specific risks related to investments in illiquid assets.”
In addition to establishing a new fund regime for long-term asset funds and overcoming operational hurdles, a Productive Finance Working Group has been formed along with HerMajesty’s Treasury (HMT) and the Bank of England.
This working group is thinking about ensuring the broader ecosystem can operationally support LTAF as a non-daily dealing fund, potentially laying the foundation for other similar funds in the future.