UK Long Term Asset Funds LTAF
29 April 2022
In October 2021, the FCA published a Policy Statement (PS 21/14) containing final rules in relation to a new authorised fund regime for investing in long-term assets. This regime is the result of long-term calls for a UK fund vehicle/regime better suited to defined contribution (DC) pension schemes to enable them to invest in long-term illiquid assets, like private equity, venture capital, real estate, infrastructure and similar alternative asset classes. Despite all the reports and efforts, it still seems like we are some way from knowing whether this new regime is worth the excitement, time and energy put into it, or whether it is nothing more than puffery and another wasted opportunity for the UK funds market.
What is an LTAF?
The Long-Term Asset Fund (LTAF) is a new type of open-ended authorised fund intended to encourage investment in long-term illiquid assets.1 The key rationale for the LTAF is to make it easier for DC pension schemes to invest in long-term illiquid assets, like private equity, venture capital, real estate, infrastructure and similar alternative asset classes. Existing regulations for authorised funds in the UK are not suitable for illiquid investments and are effectively a blocker for DC pension schemes. With trillions tied up in such schemes and the UK looking to build itself out of the pandemic, the LTAF could prove to be the key that unlocks Pandora’s box, if done correctly… and in time!
The LTAF has been in the works for some time and there has been a lot of momentum behind it. It started gathering steam after the Government’s 2017 review into patient capital (a term used to describe alternative investment assets intended to deliver long- term returns, e.g. infrastructure, private equity/debt)2 and the FCA’s own work in this area.3 The establishment of an LTAF regime was one of the recommendations contained in the 2019 report of the Investment Association’s UK Funds Regime Working Group.4 The Government and other stakeholders in the finance industry consider that investment in long-term assets is vital to the success of the UK economy post-COVID-19.5 The Chancellor of the Exchequer set out plans to introduce the LTAF in his statement to Parliament on the Financial Services Bill in November 2020. The LTAF is one of the FCA’s priorities in its Business Plan 2021-22.
The Productive Finance Working Group, set up in November 2020 to develop practical solutions to the barriers to investing in long-term illiquid assets, has been looking at creating an enabling environment for the LTAF (among other things). Its work is ongoing. In January 2021, the Government launched a call for input on the review of the UK funds regime, focusing mostly on the tax implications of the LTAF structure. It published a summary of responses to the publication in February 2022.
How can an LTAF be structured?
An LTAF is a new form of authorised fund, meaning the fund itself has to be authorised by the FCA and will be subject to the FCA’s rules, in particular in Chapter 15 of the COLL (the Collective Investment Schemes Sourcebook).
An LTAF can be structured as an authorised contractual scheme (which can take the form of a co-ownership scheme or a limited partnership), an investment company with variable capital (ICVC) or an authorised unit trust.6
How will the LTAF be regulated?
The LTAF will be an alternative investment fund. As an authorised AIF, it will need to be managed by a full-scope AIFM with permission to “manage authorised AIFs”. Many managers who currently manage private fund strategies have permission to manage only unauthorised AIFs. These managers will need to submit a variation of permission to add the authorised AIF permission to their scope of permissions. An alternative would be to appoint a service provider to act as AIFM.
As an AIF, the manager of the LTAF would be subject to the UK AIFMDi. The FCA’s rules in Chapter 15 of the Collective Investment Schemes Sourcebook (COLL) would also apply since the LTAF is an authorised fund. COLL places even greater requirements and restrictions on the manager, in terms of governance of the fund, liquidity management, investment and borrowing powers and much more. This generally means authorised funds have much more prescriptive rules than private funds.
The fund will also need to appoint a depositary in the same way as other AIFs.
What will the authorisation process look like?
The FCA has stated it will try to authorise (or reject) applications without undue delay, and within one to six months. Early engagement is key. The FCA also plans a review later in the year on whether one month or a longer period is appropriate, based on its experience of authorising LTAFs.7
A prospectus will need to be made available to prospective investors on demand. The prospectus of an LTAF will include information relating to its investment strategy, subscription and redemption terms, and charging structures. These disclosures must be set out fairly, clearly and in plain language so investors can easily understand them.8
Who can LTAFs be marketed to?
LTAFs are intended only for professional investors (such as defined contribution pension schemes) and for retail investors who are sophisticated investors or certified high-net-worth investors.9
LTAFs come under the definition of non- mainstream pooled investments (NMPIs) and, as a result, are subject to NMPI promotion rules and the restriction on promotion under COBS 4.12.3R (restrictions on the promotion of non-mainstream pooled investments).10 FCA rules provide that a firm wishing to rely on the excluded communications exemption in COBS 4.12.4R(5) to promote units in a long-term asset fund to a retail client should note its duties under the Principles and the client’s best interests rule.11
In January 2022, the FCA issued a consultation paper (CP 22/2) proposing the introduction of a new three-part classification of high-risk investments, namely (1) readily realisable securities; (2) restricted mass market investments; and (3) non-mass market investments (see our briefing here). As, Non-Mass Market Investments (NMMIs), NMPIs would be subject to the strictest regime. In the consultation paper, the FCA refers to the introduction of the LTAF regime and notes that, currently, LTAF can be marketed only to professional, sophisticated and high-net-worth investors but that the FCA is intending to consult on widening access to investments in LTAFs in a controlled way. Although LTAFs were largely excluded from proposals in the FCA January 2022 consultation paper, the FCA did propose to include LTAFs within proposals to introduce an evidence declaration where consumers will be required to state why they meet the relevant criteria.
FCA rules provide that when an LTAF fund is made available to retail clients, a KID will need to be prepared in accordance with the PRIIPs Regulation, in addition to the prospectus.12
What can LTAFs invest in?
The FCA expects the investment strategy of an LTAF to be to invest at least 50 per cent of the scheme property in assets that are illiquid and these need to be held over a longer term.13 COLL 15 outlines investments that are permitted and these include “specified investments” (within the meaning of article 74-86 of the RAO and article 89 of the RAO), immovable assets, precious metals or commodities and collective investment schemes.14
Managers of LTAFs must ensure there is a prudent spread of risk, taking into account the fund’s investment policy and objectives. There was a two-year investment period until this prudent spread of risk had to be achieved, but this has been removed from the final rules.
Other than the above, there is relatively little prescription around what LTAFs can and cannot invest in.
Can LTAFs borrow?
FCA rules provide that borrowing cannot exceed 30 per cent of the net value of the scheme property and that the authorised fund managers must take reasonable care to ensure that arrangements are in place that will enable borrowings to be closed out to ensure compliance.15
What are the requirements around redemptions and liquidity?
Under FCA rules, LTAFs are allowed to redeem units no more often than monthly. The FCA rules also require an LTAF to have a notice period for redemptions of at least 90 days. The FCA states that it would expect the notice periods of many LTAFs to be longer than 90 days. It states that, for a fund to be fair to all investors, redemptions should be met from the sale of a representative sample of the investment portfolio.16 The FCA states that ensuring consistency between the length of notice investors have to give to redeem their investment and how long it will realistically take the LTAF to sell these assets is informed by findings of recent research by the Bank of England’s Financial Policy Committee and the FCA and Bank of England’s review into open-ended funds.17 The FCA also states that the PFWG has been looking at how the wider ecosystem can operationally support the LTAF as a non-daily dealing fund.
What are the disclosure and reporting governance requirements?
FCA rules require independent directors on the board of the AFM of an LTAF18 and the rules also require a senior manager within the AFM to have a prescribed responsibility to oversee that the LTAF is being managed in the best interests of investors.19 A governing body of the AFM of an LTAF would be required to have the collective knowledge, skills and experience to be able to understand the AFM’s activities, in particular the main risks involved in the activities and the assets in which the LTAF is invested.20 The rules provide that firms which do not currently manage authorised funds would need to get additional permissions to manage an LTAF.21
The FCA expects managers of LTAFs to explain how their performance fees work, so that investors can assess the merits of investing in the fund.22
FCA rules require additional quarterly disclosures in respect of LTAFs, setting out basic information about portfolio development.
Is an LTAF different from an ELTIF?
A European Long-Term Investment Fund (ELTIF) is a type of alternative investment fund (AIF) designed for long-term investments, which can be marketed to retail and professional investors. Sounds similar, right? So what are the differences between ELTIFs and LTAFs?
The ELTIF regime was launched in 2015 and, while the policy intent and nature of permitted investments are quite similar, there are some key differences. The ELTIF is a closed-ended structure while the LTAF is not. The current ELTIF regime also appears to be more restrictive in terms of the assets that can be invested in (although, as discussed below, this is set to change).
Under the ELTIF Regulation, an ELTIF must invest at least 70 per cent of its capital in “qualifying assets” (eg non-listed companies).23 ELTIFs may not invest more than 10 per cent of ELTIF capital in any other single ELTIF, EuVECA or EuSEF. The ELTIF Regulation requires ELTIFs to run for a fixed-term period.24 An ELTIF cannot also invest in funds of funds. The ELTIF Regulation also requires an asset manager to assess a retail investor’s knowledge and experience, partially duplicating the suitability assessment under MiFID.
ELTIFs have not proven popular. As of October 2021, around 57 ELTIFs, with approximately EUR 2.4 billion in net assets under management, had been authorised to operate. These were domiciled in four jurisdictions (France, Luxembourg, Italy and Spain).25
The UK’s Long-Term Investment Funds (Amendment) (EU Exit) Regulations 2019 amended the retained version of the ELTIF Regulation to ensure that it functions effectively after Brexit, and the Regulations came into force at the end of the transition period. The UK LTIF regime (as it’s now known) broadly has the same rules as the EU ELTIF regime (minus the passport). The FCA states that only limited use was made of the specialised EU funds and no UK ELTIFs have been launched.26 Surely one for the Brexit Bonfire when HM Treasury get round to it?
In November 2021, as part of its Capital Markets Union 2021 package, the European Commission published a legislative proposal to amend the ELTIF Regulation. Many of the proposals aim to set a clearer boundary between rules aimed at ELTIFs marketed at professional investors and those aimed at retail investors. Proposals include: widening the scope of eligible assets to be invested in; relaxing current restrictions so as to enable fund-of-fund strategies and permitting ELTIFs to make use of master-feeder structures; clarification that ELTIF investment strategies can pursue a global investment mandate; increasing cash borrowing limits of ELTIFs marketed to retail investors to 50 per cent of the ELTIF threshold, and 100 per cent of the value of the capital of the ELTIF in respect of ELTIFs marketed solely to professional investors; aligning the suitability test with MiFID; lowering the threshold for eligible investment assets of ELTIFs to 60 per cent; and increasing to 20 per cent the maximum retail ELTIF exposures to instruments issued by, or loans granted to, any single qualifying portfolio undertaking.
Authors: Bradley Rice, Partner; and Bisola Williams, Paralegal.
1. FCA Policy Statement (PS 21/14) new authorised fund regime for investing in long term assets (October 2021) (p 4)
2. https://www.fca.org.uk/publications/feedback-statements/fs20-2- patient-capital-and-authorised-funds
3. https://www.fca.org.uk/publications/feedback-statements/fs20-2- patient-capital-and-authorised-funds
4. IA UK Funds Regime Working Group Final report to HM Treasury Asset Management Taskforce (June 2019) (p 23)
5. HM Treasury: Review of the UK funds regime: A call for input (January 2021) (p 5)
6. FCA COLL 15.1.1. FCA Policy Statement (PS 21/14)
7. FCA Consultation Paper (CP21/12). A new authorised fund regime for investing in long term-assets (p 19)
8. FCA Policy Statement (PS 21/14) (p 11)
9. FCA Policy Statement (PS 21/14) (p 34)
10. COLL 15.1.4G(1) FCA Policy Statement (PS 21/14)
11. COBS 4.12.13G FCA Policy Statement (PS 21/14)
12. COLL 15.4.7 FCA Policy Statement (PS 21/14)
13. COLL 15.6.7 FCA Policy Statement (PS 21/14)
14. COLL 15.6.8 FCA Policy Statement (PS 21/14)
15. COLL 15.6.17R(2) FCA Policy Statement (PS 21/14)
16. COLL 15.8.12(R) FCA Policy Statement (PS 21/14), (p 20)
17. FCA Policy Statement (PS21/14), (p 4)
18. COLL 15.7.22 (R) FCA Policy Statement (PS 21/14)
19. FCA Policy Statement (PS 21/14), (p 9)
20. FCA Policy Statement (PS 21/14), (p 10)
21. FCA Policy Statement (PS 21/14), (p 10)
22. FCA Policy Statement (PS 21/14), (p 12)
23. FCA Discussion Paper (DP 18/10) Patient Capital and Authorised Funds (December 2018) (p 18)
24. Ibid
25. Commission staff working document executive summary of the impact assessment report, November 2021
26. Ibid
