In May 2021, the FCA published a Consultation Paper (CP21/12) setting out proposals for a new category of an authorised open-ended fund called the Long-Term Asset Fund (LTAF). This new authorised fund type is designed to enable authorised funds to invest efficiently in long-term illiquid assets such as venture capital, private equity, private debt, real estate and infrastructure. The FCA believes this will help to support the economic recovery following the pandemic as investments in ‘productive finance’ assets help to provide a boost to long term sustainable growth.
The consultation paper outlines a high-level principles-based framework for the LTAF. Despite this approach, investment management firms looking to launch an FCA authorised LTAF will still have to comply with an additional set of rules specific to LTAFs, which will be set out in a new section of the FCA Handbook (COLL 15). The FCA has also specified that, due to the complexity and risks associated with an LTAF, only full-scope UK AIFMs will be allowed to manage an LTAF.
What is the FCA’s proposal?
The FCA proposes to limit the distribution of LTAFs by mirroring the rules contained within the Qualified Investor Scheme (QIS). This would restrict the use of the LTAF to professional and sophisticated retail investors, with scope permitted to widen distribution to other retail investors in the future should the FCA deem it appropriate. Within this framework, the FCA are aiming to target DC pension schemes by amending the ‘permitted links’ rules. The purpose of the existing permitted links rules is to ensure that the underlying assets in unit-linked life policies are appropriate for retail investors. They propose to remove the current 35% limit on illiquid investments where an LTAF fund forms part of the default arrangement of a pension scheme. This should allow DC Pension schemes to allocate a proportion of their default funds to LTAFs that are largely illiquid, in combination with other funds consisting of more liquid assets. A report published by the Productive Finance Working Group in October entitled ‘A Roadmap for Increasing Productive Finance Investment’, has provided further recommendations to the FCA to create an attractive investment environment for DC pension schemes. These include building the DC market’s scale to make it easier for them to invest in less liquid assets, changing the rules for investment in illiquid assets through unit-linked funds and widening distribution to appropriate retail clients from the outset.
Liquidity Management
With regards to liquidity management, the FCA has opted to allow managers to choose liquidity tools that are appropriate to their investment strategy. Examples discussed in the consultation include using notice periods on redemptions and subscriptions to defer redemptions and limit the number of funds that can be redeemed at any point. The FCA has warned, however, that suspensions should not be relied on as a means of managing fund liquidity and that managers will need to ensure that they have the necessary tools to manage liquidity and these are appropriate for the assets that LTAF has invested in.
Additional governance and disclosure requirements will be required for each LTAF to promote investor confidence. LTAFs will be required to assess how the fund is being managed in the fund’s best interests with references to the fund’s valuations, due diligence, liquidity and conflicts of interests. This responsibility, and the responsibility for complying with LTAF requirements in general, will need to be allocated to an approved person. With regards to valuing the assets of the fund, the FCA has stipulated that this must be prepared by a manager of the fund, or if the correct level of competence and experience in valuing assets of that type cannot be demonstrated, an external valuer.
The FCA has also proposed to introduce increased reporting obligations, requiring LTAFs to report quarterly to their investors on portfolio investments, transactions and developments during the relevant period. These reports aim to allow increased monitoring oversight from investors and will be produced in addition to bi-annual and annual reports.
Further to the consultation period closing in June 2021, and subject to the feedback received from this, the FCA plans to publish a final policy statement and handbook rules in late 2021.
