FCA consultation on fund to support investment in long-term assets
What has happened?
The FCA has, in May 2021, launched a consultation (CP 21/12) on proposals for a new category of authorised fund, the long-term asset fund (LTAF), designed to invest in long-term, illiquid assets. 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 consultation is open for feedback until 25 June 2021.
What do you need to do?
The aim of this new fund 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. The investment strategy of an LTAF will have to be to invest mainly in assets that are long-term and illiquid in nature, or in other collective investment schemes which invest in such assets. The FCA would expect more than 50% of the value of the LTAF’s scheme property to be invested in unlisted securities and other long-term assets or in other collective schemes investing in such assets
Initially, the FCA is proposing to restrict the distribution of the LTAF, which will be an Alternative Investment Fund, to professional investors and sophisticated retail investors. Only full-scope UK AIFMs will be able to manage an LTAF.
The FCA is proposing that LTAF rules (to be contained in the COLL sourcebook) would cover 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 would help give investors confidence that they are being managed appropriately and in their interests. The FCA has based the LTAF rules on the rules in COLL 8, with additional protections, but has structured them slightly differently. The investment powers of the fund will be based on the existing rules for Qualified Investor Schemes and will also enable the fund to invest in loans and to borrow up to 30% of its value.
The LTAF would also be aimed at defined contribution schemes that may be interested in investing part of their assets into an LTAF, in line with their investment horizons and risk appetite. This consultation, therefore, proposes amending the permitted link rules to enable DC pension 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.
The FCA has also convened the Productive Finance Working Group to consider how to ensure that the wider ecosystem can 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.
The FCA hopes to authorise new LTAFs within one month, but will not yet formally commit itself to that target.
How can we help you?
If you’d like to know more about how we can help you with your AIF authorisation or compliance arrangements, or any other regulatory compliance issues, our expert team is here to help.
Contact us today on 0207 436 0630 or email info@thistleinitiatives.co.uk.