Introduced in November 2021, long-term asset funds are FCA-regulated fund structures designed to offer access to investments in long-term, illiquid assets. These includes private equity, venture capital, private debt, and investments in infrastructure assets. They can be thought of as the UK’s answer to broadening access to unlisted assets, and can be compared to interval funds in the United States and ELTIF funds in the European Union.
LTAFs are hybrid fund structures that blend characteristics of open-ended and closed-ended funds. They are designed to be used by a wide investor base, though the initial focus was on defined contribution (DC) pension schemes, which have not had significant exposure to unlisted assets.
For direct retail investors, access to LTAFs outside of DC pensions is for now limited due to platform availability. Moreover, they have been able to invest in private assets via the UK’s investment trust sector, which has long offered access to alternative asset classes, and offer plentiful liquidity. This lessens the impact of this new fund structure. There are trade-offs, of course, such as high net asset value discounts in investment trusts and sometimes-obscure cost structures.
Ultimately, an expansion in the variety of investment options for retail investors should be applauded, but there are risks. Caution is a wise course here; it will take time for LTAFs to earn their place in direct retail portfolios.
Key Features of Long-Term Asset Funds
By design, LTAFs are not a one-size-fits-all fund structure. The structure is designed to permit a wide latitude in terms of investment strategy, asset classes targeted, liquidity terms, and even product type.
Some common characteristics include:
• An LTAF must invest at least 50% of its assets in unlisted securities and other long-term assets.
• They can invest in private equity, venture capital, private credit, real estate and infrastructure.
• They can invest in other funds, and can be set up as feeder funds.
• Each must be managed by a designated alternative investment fund manager.
• Redemptions can be no more frequent than monthly.
• They require a notice period for redemptions of at least 90 days.
• Subscriptions are variable, but typically monthly or quarterly.
Investing in Less-Liquid Assets
The genesis of LTAFs can be found in the UK’s Productive Finance Working Group, which brought together the Treasury, Bank of England, and FCA. It was established to encourage greater investment in less-liquid assets and improve long-term investor outcomes. There was a particular emphasis on pension savers, who have suitably long horizons. Of course, there are other incentives at play, like increasing investment in domestic infrastructure and the local economy while the UK government budget is constrained.
These goals underlie recent regulatory changes, like the removal of some obstacles to investor access to unlisted assets, or the launch of suitable fund vehicles that can invest in long-term assets. The Mansion House Compact, announced by the government in July 2023, gave further impetus to the initiative, leading to voluntary commitments from DC default funds to invest at least 5% of their assets in unlisted equities by 2030. Access is not limited solely to pensions, however.
Who Can Buy a Long-Term Asset Fund?
A seismic change took place in July 2023. Regulatory change saw units in LTAFs reclassified from non-mass market investments to restricted mass market investments, meaning access has broadened to:
• Advised/Discretionary Managed Retail Investors: These investors can access LTAFs if they receive financial advice and meet suitability requirements.
• Direct Retail Investors: They can invest up to 10% of their investable assets, provided they receive a personalized risk warning and meet appropriateness requirements.
• Self-Select DC Investors: These investors can access LTAFs subject to exposure limits and appropriateness assessments.
• Non-Advised Policyholders: Those in long-term unit-linked products, including non-qualifying pension schemes, can invest subject to appropriateness assessments
For Now, Access to LTAFs is Very Limited
Retail access hinges on investment platforms making LTAFs available. So far, progress here has been slow. Investment platforms want tangible evidence of prospective demand to prioritize onboarding new funds, leading to a chicken-and-egg situation. How can you prove demand if nobody can access a fund?
Platforms also point to the UK’s established investment trust sector, which has long offered retail investors access to unlisted assets and is a proven investment vehicle. There is also the question of technological constraints. Many UK investment platforms are set up to cater primarily to daily dealing funds. Meanwhile, LTAFs have the potential for very different liquidity terms, new risk disclosures, variable notice periods, and side pockets, which complicates things.
UK platforms are also facing a significant trade-off in how they allocate resources. The move from the legacy packaged retail investment and insurance regime is significant. This set of EU regulations impacts risk reporting, cost reporting, and the publication of documentation like KIIDs. It is being replaced by the UK’s new Consumer Composite Investments (CCI) rules.
The transition is expected to be very time-consuming, introducing new documents, changes to cost and risk disclosures, and performance. Even with 18 months to implementation from the end of March 2025, platforms face a gargantuan task, and CCI-related projects are an operational necessity. It may take time for retail-facing investment platforms to make LTAFs available amid this change.
More Regulatory Changes Ahead for LTAFs?
Multiple regulatory developments in active discussion may speed up the adoption of LTAFs. In April 2024, LTAFs became available for inclusion in innovative finance ISAs. This is a very niche investment product, but if LTAFs are made available in traditional ISAs, this could accelerate their appeal.
One should also watch self-invested pension products. Currently, LTAFs are investible within a SIPP, but they sit in the non-standard investment category. This leads to higher capital adequacy requirements from the SIPP operator, and only the more sophisticated SIPP providers are willing to hold capital against investments. Inclusion in the standard investment category could prove a catalyst for the nascent sector.
Investment Trusts: An Alternative to LTAFs?
LTAFs need to be put in the context of the UK’s well-developed investment trust sector. Direct retail investors have long had access to unlisted assets via listed investment companies. Many of these have long track records and are easy to access. Their closed-end structure protects them from liquidity mismatches, so they are well-suited to holding illiquid assets. Of course, they trade at market prices rather than their net asset values.
Share prices can move away from NAV at times of market stress, both for technical reasons and when the market does not have faith in underlying valuations. We have seen discounts to NAV widen in recent years, but NAV performance has been attractive for many over the long run, and some trusts have been taking steps to reduce their discount. Meanwhile, minimum subscription amounts are low.
What’s the Future of Long-Term Asset Funds?
The convergence of public and private markets represents one of the most profound structural shifts in modern finance. Evergreen investment structures like LTAFs are just one facet of this shift.
We think there are many additional considerations when thinking about investing in a manager that invests in unlisted assets. This includes a clear understanding of costs, liquidity profiles, transparency, deal access, and valuation. Investors should understand what they want to achieve, and how private exposure may complement a broader portfolio.
They should set realistic performance expectations and have a nuanced understanding of how correlated this may truly be with other assets. It’s important to be aware of what AQR Capital Management founder Cliff Asness dubbed “volatility laundering”, where the infrequent marking to market can lead to gaps in NAV and their real market values, disguising their true volatility.
Despite this, with the right manager, private market exposure is helpful. Here we expect LTAFs will take time to blossom for direct retail investors, but they’re growing in prominence in the DC pension space for which the structure was designed. In time, this may well change, but those seeking exposure to unlisted assets may want to consider investment trusts, which have long track records, easier access, easy-to-understand liquidity, and valuation opportunities.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
