The arrival of the UK’s first long term asset fund (LTAF) targeting the retail wealth management sector in October 2024 has prompted the industry to consider whether this marks a significant and lasting shift in providing individual investors with access to private market assets, or if liquidity constraints will render it a fleeting trend. A recent article in the Financial Times sheds light on the challenges that managers are encountering with retail LTAFs, which we explore briefly below.  

First, let’s take a step back…

What are the key distinctions between LTAFs and traditional private market funds? Typically, LTAFs are designed to manage illiquid private market assets while providing wealth management and private banking investors with occasional opportunities to withdraw their investments. In contrast, traditional private market funds typically impose a minimum lock-up period of ten years. 

Another significant distinction between these two investment avenues is the lower minimum threshold required for an LTAF compared to that of traditional private market funds. Whilst some commercial property funds may face liquidity challenges during market downturns, LTAFs do not permit daily trading. Instead, these funds accept new investments on a monthly basis and require a minimum of 90 days' notice for withdrawals. Having said that, even with this notice, there is still no guarantee that investors can withdraw their entire investment at once, as LTAFs limit liquidity to just 5% of the fund’s net asset value (NAV) each quarter. Consequently, if demand for withdrawals exceeds this threshold, redemptions may be gated to prevent the need for rapid asset sales.

What challenges do managers need to navigate the LTAF space?

Managers seeking to launch LTAFs must be able to demonstrate to regulators that they are able to maintain sufficient liquid assets within the fund to accommodate anticipated redemptions. Practically, this means holding up to 20% of the fund’s NAV in cash and other liquid assets to ensure 5% quarterly liquidity for the upcoming year. Consequently, this requirement may result in returns for LTAF investors that do not match those of institutional funds. Additionally, it is important to consider the fee structure, because the accumulation of fees associated with LTAFs tend to be higher than the ongoing charges for private equity investment trusts.

LTAFs are still relatively new to the UK market, and it will likely take time for wealth managers and investment advisers to build awareness and support for retail LTAFs, whilst also being able to demonstrate how this new type of fund fits into a set of portfolio options ranging from highly liquid vehicles to illiquid limited partnership funds. Moreover, despite unusually low minimum investments appearing to make the product accessible to more investors, the high fees incurred must be kept in mind. It will be interesting to see the benefits gained by investors from the LTAF, compared to traditional, longstanding products that already exist in the private market space. All of this brings to mind the question – are LTAFs a fleeting opportunity or a lasting shift in the market? 

Written by Madeleine Chambers and Sarah Logeswaran