The UK’s new authorised open-ended fund: the Long-Term Asset Fund (LTAF)
In October, the FCA published its Policy Statement ‘PS21/14: A new authorised fund regime for investing in long term assets’, which provides feedback to the May 2021 consultation, setting out the final rules and guidance for the new authorised open-ended fund to invest in illiquid assets, the Long-Term Asset Fund (LTAF).
The FCA states that long-term illiquid assets provide a useful alternative investment opportunity for investors with long-term investment horizons who understand and can bear the risks associated with such assets. Investing in long-term illiquid assets through an appropriate means of governance is important to support economic growth and the transition to a low carbon economy. Additionally, with the economic fallout of Covid-19, it is considered even more important that a long-term investment culture is fostered.
The LTAF aims to address two barriers that impede investment in long-term illiquid assets:
- “there is no UK authorised open-ended fund structure that enables investment in long-term illiquid assets while offering appropriate structural safeguards
- the permitted links rules for unit-linked insurance hinder investment in illiquid assets”.
The Long-Term Asset Fund will have its own separate and distinct chapter under COLL 15 in the FCA Handbook, rather than being treated as a sub-set of the qualified investment scheme (QIS), as the LTAF is based on the rules of the QIS, with additional protections.
The new rules come into effect on 15 November 2021. Before this date, the FCA is encouraging firms that are considering making a variation or an authorisation application for an LTAF to engage with it prior to submitting an application.
What is the Long-Term Asset Fund / LTAF?
Since Brexit, the LTAF is the UK’s first proposed change to the fund regime and has received positive and widespread industry support. As stated above, the LTAF is a new type of open-ended FCA authorised investment fund with the purpose of investing in assets that are long-term and illiquid in nature, including venture capital, private debt, private equity, real estate and infrastructure.
Long-term illiquid assets pose higher risks than diversified portfolios of listed equity or bonds, however, they have the potential for higher long-term returns in exchange for less or no immediate liquidity. Likewise, LTAFs will broaden choices to investors by widening options while providing an appropriate level of investor protection.
The LTAF can take the form of an authorised contractual scheme, an authorised unit trust or an ICVC.
What rules apply to the LATF?
The Long-Term Asset Fund will be an alternative investment fund (AIF) and only firms authorised as full-scope UK alternative investment fund managers (AIFMs) with the “managing an authorised AIF” permission will be permitted to manage LTAFs.
To cater for regulatory concerns around liquidity mismatch, the final rules introduce new specified minimum standards that require LTAFs to permit redemptions no more frequently than monthly and to have at least a 90-day notice period on redemption.
What do existing firms need to do?
The FCA has set additional requirements for the LTAF that consider the risks to which the LTAF might be exposed.
- Only a firm that is authorised as a full-scope UK AIFM can manage an LTAF.
- A senior manager has the responsibility to oversee the LTAF and that is it managed in the best interests of investors. A manager of an LTAF must demonstrate that they:
- Possess the knowledge, skills and experience to understand the activities of the LTAF and the risks involved.
- Employ sufficient personnel with skills, knowledge and expertise necessary for discharging the responsibilities allocated to them.
- UK AIFMs who do not currently manage authorised funds would need to vary their permission to include the “managing an authorised AIF” permission in order to manage an LTAF, which may take up to six months to obtain (and, at the time of writing, potentially longer).
- Firms will need to ensure that at least 25% of the members of the governing body are independent and must appoint at least two independent directors to meet the requirement for all AFMs in COLL.
The FCA has made some important adjustments to reflect industry feedback. LTAFs can only be promoted to sophisticated and high net worth retail investors and professional investors, such as defined contribution (DC) pension schemes initially. Moreover, The LTAF will be subject to the non-mainstream pooled investments promotion rules, meaning it can only be promoted to professional investors and only limited retail investors such as certified sophisticated, self-certified sophisticated and certified high net worth investors as outlined in COBS 4.12.
The FCA state that this is an “appropriate first step”1 to allowing retail access to the LTAF. Currently, the LTAF is not considered to be suitable for unrestricted distribution to all retail investors, but the FCA aims to pave the way for wider distribution of LTAFs to non-sophisticated retail investors, with the amended rules expected to be consulted in the early half of 2022.
To make the LTAF more desirable to DC pension schemes, the FCA will change the ‘permitted links’ regime in COBS 21.3 to treat the LTAF as a permitted link as a distinct unit by exempting it from the 35% limit on illiquid investments within any unit-linked funds. Likewise, the FCA is amending the definition of ‘permitted units’ to make it clear that it includes permitted links, including LTAFs.
Ultimately, Long-Term Asset Funds are intended to provide investment flexibility as well as appropriate protections for investors. The FCA proceeds with caution regarding the ‘retailisation’ of LTAFs but will consider opening the access to LTAFs to a broader range of retail investors in the amendment rules due in early 2022.