The Financial Conduct Authority has set out new rules which give retail investors and defined contribution (DC) pension schemes access to Long Term Asset Funds (LTAFs).
The LTAF is a type of open-ended authorised fund, which the FCA introduced in 2021, designed to invest efficiently in long-term, illiquid assets, such as venture capital, private equity and private debt, real estate and infrastructure.
LTAFs are a higher risk which can provide greater diversification to investment portfolios and also potentially higher returns but less immediate liquidity and longer redemption periods.
LTAFs will be subject to additional protections under the FCA’s high risk investment framework.
Prior to LTAFs arrival on the retail market, the regulator is seeking views on whether the protections of the Financial Services Compensation Scheme (FSCS) should be available for the LTAF product. Or if a different approach is needed.
The FCA believe the ability to invest in illiquid assets through managed investment vehicles “is important for supporting economic growth and the transition to a low carbon economy”.
Additionally, the FCA, Bank of England (BoE) and Treasury in November 2020 created the Productive Finance Working Group.
The group aimed to develop practical solutions to the barriers to investing in long-term, less liquid assets and was closed in April 2023 after the BoE stated the group had “accomplished its objectives”.
The FCA is also looking at potential opportunities to change the range of FSCS protection, this includes its relation to non-standard asset types.
FCA executive director Sarah Pritchard said: “Longer-term less liquid real assets can generate good alternative returns for investors and, crucially, help to grow the UK economy through investments, such as new infrastructure.
“Our new rules allow retail investors, and pension funds, to invest in productive finance, but they also recognise that long-term investments can be riskier. That is why people will be given clear risk warnings and customer assessments, in line with other higher risk products.”
Interactive Investor head of funds research Dzmitry Lipski added: “History has shown time and again that the closed ended structure of investment trusts is well suited to long term assets such as property and infrastructure. But that doesn’t mean we shouldn’t be closed to innovation elsewhere, especially when it is designed to promote choice and boost UK economic growth.
“Traditionally, our customers have tended to opt for investment trusts over funds when it comes to illiquid assets, but that doesn’t mean that there is no room for LTAFs on a selective basis. As ever, investors need to do their homework and look at each on a case-by-case basis.
“No structure is perfect. The price you pay for daily dealing in investment trusts is the discount, and any investment trust or fund is only ever as good as the people running it.”
