The FCA has launched a consultation on proposals for a new category of fund designed to invest efficiently in long-term, illiquid assets.
Within the consultation[1], the proposal is that these funds would be open-ended and would be able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure, often referred to as productive finance.
The aim of this new long-term asset fund (LTAF) would be to provide a fund structure through which investors can invest with appropriate confidence in less liquid assets because the fund structure is specifically designed to accommodate relatively illiquid assets. These illiquid assets can offer attractive expected returns to investors. If successful, the existence of funds investing in these assets can also help businesses and infrastructure projects have greater access to long-term capital to support investment and wider economic growth.
In his statement to Parliament on the Financial Services bill on 9 November 2020, the Chancellor committed to the first Long-Term Assets Fund being launched within a year. Investors can already invest in such assets through closed-ended structures, or a range of private structures. But some investors prefer investing in open-ended funds where there are opportunities to put money in or take it out at the net asset value of the assets. However as seen with property funds, open-ended structures investing in illiquid assets can face problems if they offer daily dealing to investors.
The FCA is therefore proposing that LTAF rules embed longer redemption periods, high levels of disclosure, and specific liquidity management and governance features. These would take account of the types of risk to which LTAFs might be exposed and help give investors confidence that they are being managed appropriately and in their interests.
Aside from offering an alternative investment opportunity to experienced retail investors, the LTAF would also be aimed at defined contribution (DC) schemes which may be interested in investing part of their assets into an LTAF, in line with their investment horizons and risk appetite. A recent survey commissioned by the Department for Work and Pensions (DWP) found that two thirds of these schemes do not invest in illiquid assets, while the remaining third invest between 1.5% and 7%. This consultation also, therefore, proposes amending the permitted link rules to enable pensions schemes to consider the proportion of illiquid assets across their investment portfolios, rather than to restrict the proportion of illiquid assets in each underlying fund in which they invest.
Nikhil Rathi, Chief Executive of the FCA, commented on the proposals:
‘It is important for overall economic growth that the financial system supports investment that may take time to deliver a return. This is in addition to the potential benefit to investors themselves. We think our proposals would enable the establishment of authorised funds that are appropriate for both professional investors and sophisticated retail investors that want this type of investment risk and opportunity.
‘This new type of fund may also be more attractive to DC pension schemes that have long investment horizons and who under current fund structures, find it difficult to invest in these types of assets.
‘Nevertheless, it is important that the LTAF commands the confidence of target investor groups and can meet their needs. We therefore propose rules to secure an appropriate level of consumer protection and to address specific risks related to investments in illiquid assets.’
Establishing a new fund regime, and overcoming operational hurdles, are only 2 steps in creating an environment in which investment in longer-term, less liquid assets can flourish. To address these wider questions, together with Her Majesty’s Treasury (HMT) and the Bank of England, the FCA has convened the Productive Finance Working Group. The Group is considering how to ensure that the wider ecosystem can operationally support the LTAF as a non-daily dealing fund. This could lay the ground for other similar funds in the future. This working group is expected to draw its conclusions in July 2021. In making final rules, the FCA will consider any recommendations of the Productive Finance Working Group.
The FCA is keen to hear views from stakeholders on its proposals and the consultation is open for feedback until 25 June 2021.
The FCA recognises that its work on notice periods for property funds and the LTAF have several areas of consideration that overlap. It is also therefore today publishing the feedback to the property fund consultation[2] and updating on next steps.