The FCA has launched a consultation on proposals for a new category of fund designed to invest efficiently in long-term, illiquid assets.
It proposes a flexible regime that aims to offer an appropriate level of investor protection and to address the specific risks of investing in long-term illiquid assets via an open-ended fund. Initially, the FCA proposes to restrict distribution of the LTAF to professional investors and sophisticated retail investors.
The aim of this new long-term asset fund (LTAF) would be to provide a fund structure through which investors can invest with appropriate confidence in less liquid assets because the fund structure is specifically designed to accommodate relatively illiquid assets. These illiquid assets can offer attractive expected returns to investors. If successful, the existence of funds investing in these assets can also help businesses and infrastructure projects have greater access to long-term capital to support investment and wider economic growth.
In his statement to Parliament on the Financial Services bill on 9 November 2020, the Chancellor committed to the first Long-Term Assets Fund being launched within a year. Investors can already invest in such assets through closed-ended structures, or a range of private structures. But some investors prefer investing in open-ended funds where there are opportunities to put money in or take it out at the net asset value of the assets. However as seen with property funds, open-ended structures investing in illiquid assets can face problems if they offer daily dealing to investors.
The FCA is therefore proposing that LTAF rules embed longer redemption periods, high levels of disclosure, and specific liquidity management and governance features. These 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.
Aside from offering an alternative investment opportunity to experienced retail investors, the LTAF would also be aimed at defined contribution (DC) schemes which may be interested in investing part of their assets into an LTAF, in line with their investment horizons and risk appetite. A recent survey commissioned by the Department for Work and Pensions (DWP) found that two thirds of these schemes do not invest in illiquid assets, while the remaining third invest between 1.5% and 7%. The consultation also, therefore, proposes amending the permitted link rules to enable pensions schemes to consider the proportion of illiquid assets across their investment portfolios, rather than to restrict the proportion of illiquid assets in each underlying fund in which they invest.
Responses to the consultation are required by 25 June 2021.
Click on the link for further information.