Written by Harrison Folland
The FCA has launched a consultation ("CP21/12: A new authorised fund regime for investing in long term assets") on proposals for a new category of fund - the "long-term asset fund" or "LTAF", designed to invest in long-term, illiquid assets.
The proposal is that these open-ended funds would be able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure (also known as collectively as "productive finance").
The LTAF will provide a fund structure for investors to access less liquid assets with confidence, as the structure is designed specifically with these less liquid assets in mind - with the FCA noting that it is "proposing that LTAF rules embed longer redemption periods, high levels of disclosure, and specific liquidity management and governance features. These [features] would take account of the types of risk to which LTAFs might be exposed and help give investors confidence that they are being managed appropriately and in their interests".
The Chancellor has committed to the first LTAF being launched within a year. While investors can already invest in these illiquid assets through private or closed-ended structures, some investors prefer open-ended funds where money can be put in or taken out at the net asset value of the assets. Open-ended structures that invest in illiquid assets can face liquidity problems, particularly where daily dealing is offered.
Given their long-term investment horizons and different risk profile, the FCA's update notes that LTAFs may be of particular interest for defined contribution (“DC”) pension schemes. The FCA’s consultation also proposes amending the permitted link rules to enable pension schemes to consider the proportion of illiquid assets across their investment portfolios, rather than pension schemes being restricted by the proportion of illiquid assets in each underlying fund in which they invest.
The Productive Finance Working Group (comprised of HM Treasury, the Bank of England and the FCA) has been convened to address the operational issues involved with the establishment of this new fund structure and creating an appropriate environment in which investment in long-term, illiquid assets can flourish; the working group will consider how best to ensure that the LTAF is supported in the wider financial ecosystem, with the hope that similar funds may be established in the future.
The consultation is open for stakeholder feedback until 25 June 2021, whilst the Productive Finance Working Group is expected to draw its conclusions in July 2021; the FCA will consider the working group's recommendations when making its final rules on the topic.
"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." Nikhil Rathi, Chief Executive of the FCA