Illiquid nourishment: FCA finalises rules for introduction of long-term asset funds

The FCA has finalised its framework for a new type of regulated open-ended investment fund: long-term asset funds. LTAFs are designed to remove barriers to investing in long-term, illiquid assets and spur investment in areas such as venture capital, private equity, private debt, real estate and infrastructure. 

The long and the short of LTAFs

The LTAF regime is underpinned by new FCA rules and guidance, developed to provide necessary structural safeguards. To address the systemic risk of a liquidity mismatch - put simply, where the fund invests in illiquid underlying assets but allows redemptions at any time without notice - the FCA, has sought to align the amount of notice needed for investors to redeem their investment and, how long it will likely take for the LTAF to sell these assets. 

Under these minimum standards, LTAF redemptions will be:

• permitted no more frequently than monthly; 
• subject to at least a 90-day notice period. 

LTAFs are primarily aimed at defined contribution (or money purchase) pension schemes in view of their risk appetite and investment horizons. However, the FCA's distribution rules go further to allow LTAFs to be promoted more broadly to sophisticated and professional investors, as well as high-net-worth individuals.

LTAFs in the longer term

Inevitably, the next question for LTAFs is whether the FCA should allow distribution to retail investors. The FCA is keen not to impose unnecessary restrictions on where members may invest, particularly in relation to investments that chime with their attitude to risk. 

With that in mind, the FCA plans to consult on allowing certain retail investors to directly invest in LTAFs in 2022. The FCA will need to strike a careful balance between throwing the doors open to retail investors and ensuring appropriate safeguards are place for what will ultimately be higher-risk investments than most retail investors are familiar with. 

For more detail on LTAFs see our client note.