Long-term asset funds to address liquidity mismatch

Following a consultation period, the Financial Conduct Authority (FCA) has approved a new type of investment fund.

The Long-Term Asset Fund (LTAF) regime is intended for sophisticated investors and pension funds, giving them access to a new type of open-ended investment fund supporting investment in assets, including infrastructure and private equity.

Investments in less liquid assets such as these can deliver a higher long-term return but come with challenges if investors need short-term access to the money.

Another potential advantage of opening up investment in long-term assets is boosting the broader economy as it recovers from the pandemic.

As things stand, some investors are unable or unwilling to invest in long-term assets due to a liquidity mismatch between the underlying assets and the short-term nature of the investment fund structure.

Nikhil Rathi, Chief Executive of the FCA, said:

“We are supporting fresh collaborative thinking designed to improve the effectiveness of UK markets while protecting standards. If this innovative fund structure, created by our rules, is taken up by the asset management industry, it may provide alternative routes to returns for investors, while supporting economic growth and the transition to a low carbon economy.”

Under the new rules, fund providers can create a Long-Term Asset Fund as a regulated fund explicitly designed to help investment in assets including venture capital, private equity, private debt, real estate and infrastructure.

Because these assets can take longer to sell, the FCA has introduced rules to align the time it takes to sell less-liquid assets and how often investors can sell their holdings in the fund.

LTAFs also target defined contribution pension schemes, assuming they suit the investors’ investment horizons and risk appetite. Sophisticated investors and some high-net-worth individuals may also find these new funds attractive.

Next year, the FCA will consult on widening the distribution of LTAFs to some retail investors.

Opening these regulated funds to a retail investor audience would offer an alternative to the currently available long-term investment routes, including unauthorised funds. Retail investors would need to understand the risks involved.