LTAF or Having a Laugh?

In November of 2020, the then chancellor Rishi Sunak set out his plans for “renewing the UK’s position as the world’s pre-eminent financial centre” in his Financial Services Statement. These plans included the issuance of the UK’s first ever Sovereign Green Bond, the review of the UK’s listing regime, and the introduction of the Long-Term Asset Fund (“LTAF”).

Now, almost two years after this introduction, the Financial Conduct Authority (“FCA”) has issued a consultation paper setting out a proposal to broaden retail access to LTAFs (CP22/14), but the question remains: What is an LTAF? And does anyone actually want one?

The concept behind the LTAF was to create an authorised open-ended fund that enabled investors to invest in long term illiquid assets (venture capital, private equity, private debt, property and infrastructure) in an efficient manner, but with greater protections including redemption rights.

Such funds would meet the investment requirements for certain investors, primarily defined contribution (“DC”) pension schemes, who could benefit from long-term investment opportunities but whose default strategies were not investing, or could not invest, in existing private equity or infrastructure closed-ended funds despite their long-time horizons. 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.

The FCA issued a consultation paper regarding LTAFs in May 2021 (CP21/12) proposing a flexible regime offering the protections deemed necessary, and followed that up in October 2021 with a Policy Statement (PS21/14) which set out the finalised rules for what was hailed as “an innovative new category of open-ended authorised funds.”  

In 2015, the European Union (“EU”) was looking to further strengthen and integrate the capital markets of the individual member states following the launch of the Capital Markets Union (“CMU”) policy by the European Commission President Jean-Claude Junker the year prior. Part of this plan was to boost long-term investments in the “real economy” across Europe, and thus the European Long-Term Investments Fund (“ELTIF”) was born.  

The rules for what an ELTIF could invest in aimed the funds firmly at the private equity, debt, and infrastructure sector but had strict exposure limits. 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.

Take up of the ELTIF structure was limited, and in the years that followed very few funds came to market. In June of 2020, a review of the ELTIF regulation was called for as part of a reinvigoration of the CMU and a public consultation on the EU rules for long-term investment funds was launched. So as the UK was indulging in some post-Brexit freedoms and launching “innovative” products, the EU was reviewing some long-standing regulations that bore an uncanny resemblance to the new UK Funds.

Fast-forward to today and a Freedom of Information request submitted by ACA Group to the FCA reveals that they have received zero ELTIF applications and zero LTAF applications as of 14 July 2022. To put this in context, the FCA authorised 313 funds in 2020 alone (this number consists of UCITS, NURS and QIS – all types of funds aimed at retail investors).

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).

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.

Article first seen in Investment Week

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