Back in November 2020, Rishi Sunak – then Chancellor of the Exchequer – set out plans for the financial services sector that included the introduction of long-term asset funds – also known as LTAFs. What are they, and are they wanted?
This was a question asked recently by RegTech firm ACA Global, who asked the question of what LTAF’s actually are, and whether there is a need for them in the market.
The concept behind the LTAF was to create an authorised open-ended fund that enabled investors to invest in long-term illiquid assets in an efficient manner, but with greater protections including redemption rights.
ACA detailed that such funds would meet the investment requirements for certain investors – primarily defined contribution pension schemes – who could benefit from long-term investment opportunities, but whose default strategies were nor investing in existing private equity or infrastructure closed-ended funds.
This in turn would provide additional capital flow to private companies and infrastructure projects benefitting the overall UK economy and helping to reduce the UK’s infrastructure gap. The ambition of the chancellor was to see the first LTAF launched within 12 months.
There has also been movements on LTAFs in Europe, with the European Union creating the European Long-Term Investments Fund. According to ACA, the rules for what an ELTIF could invest in aimed the funds firmly at the private equity, debt and infrastructure sectors. This is in addition to a strict conflict of interest article stating the manager of an ELTIF could not have direct or indirect interest in any assets the ELTIF invests in, so prohibiting co-investment with funds under the same management.
ACA highlighted that take up of the ELTIF structure was limited, in the years that followed, very few funds came to market.
A recent FoI submitted by ACA to the FCA revealed that the authority has received zero ELTIF applications and zero LTAG applications as of 14 July 2022.
ACA commented, “Such overwhelming lack of enthusiasm for the LTAF may then explain why the FCA has issued CP22/14, which proposes opening LTAFs to a far wider retail market by allowing investments by individuals who sign a declaration stating they have not invested more than 10% of their net assets in the last 12 months, and will not in the next 12 months, in certain types of assets.
“However, while the Consultation Paper potentially widens the customer base for LTAFs to a wider retail market and also proposes permitting the broadening of LTAF distribution to members of Defined Contribution pension schemes, firms would then also need to comply with the requirements of the FCA’s new Consumer Duty (PS22/9).”
ACA concluded, “Nearly two years since the LTAF was unveiled, it seems to be nothing more than a regulatory anagram for FLAT, which is clearly how it has fallen with the industry. It could be argued that the FCA’s attempt to resuscitate the LTAF is a sign of an emerging conflict between its newly implemented goals of promoting growth and competition and its longstanding aims of enhancing consumer protections and disclosures.
“The ongoing drive for the democratisation of the private equity sector, and the wider private markets in general, is hardly a secret, but it is evident that the LTAF structure, and the potential regulatory burden that it brings with it, remains unpalatable to managers.”
