The Financial Conduct Authority (FCA) in the UK is moving ahead with plans to create a new type of open-ended fund which could facilitate greater investment by defined contribution (DC) pension schemes in unlisted infrastructure and real estate.
The regulatory body has finalised rules for the long-anticipated Long-Term Asset Fund (LTAF), which include minimum redemption notice periods of 90 days and a ban on offering redemptions more frequently than once a month.
Nikhil Rathi, CEO of the FCA, said: “If this innovative fund structure, created by our rules, is taken up by the asset management industry, it may provide alternative routes to returns for investors, while supporting economic growth and the transition to a low carbon economy.”
The UK government is keen to remove obstacles to DC pension schemes investing more in illiquid UK assets, such as infrastructure. The publication of the FCA’s policy statement, A new authorised fund regime for investing in long term assets, comes after an industry consultation and also follows the recent publication of several recommendations for facilitating greater investment in long-term, illiquid assets by the Productive Finance Working Group.
Earlier this year, the FCA delayed decisions over introducing similar restrictions on redemptions and notice periods to open-ended property funds, which have experienced a series of liquidity crunches in recent years, as it turned its attention to the LTAF.
Today, the FCA said it was putting in place rules for the LTAF “to ensure there is a consistency between how long it will take to sell assets and how often and quickly an investor will be able to sell out of the fund”.
The FCA will be consulting next year on the potential for widening the distribution of the LTAF to certain retail investors.
Jonathan Lipkin, director of policy, strategy and research for the Investment Association, said: “Investing in illiquid assets is a way for savers to diversify their portfolios and at the same time provide capital for companies and infrastructure, which boost the economy.
“The LTAF will offer DC pension schemes and certain sophisticated retail investors a new way to access illiquid investments through a fund structure designed specifically for such investments, with notice periods that are consistent with the time it takes to sell the underlying asset.
“We welcome the FCA’s policy statement and the commitment to look closely at allowing the LTAF to be sold to a broader range of retail investors, with appropriate safeguards, in the future. We look forward to working with policy makers, investment managers, distributors and other organisations to make the LTAF a success.”
John Forbes, independent consultant on real estate funds, said that, while the policy statement “does not deliver everything we might want as an industry, it is a big step forward”. He added: “For the full benefits to be felt for DC pension schemes, we need further changes from the Department of Work and Pensions, some of which have been trailed and appear to be imminent and changes to the platform architecture.”
A spokesperson for Legal & General, which manages private-market capital and DC pension capital, said: “This new instrument has the potential to provide diversification and illiquidity premium benefits to investors, as well as allowing more capital to invest in physical assets and infrastructure, supporting the government’s ‘Build Back Better’ initiative.
“Over many years, non-listed assets have outperformed listed securities, but these gains have mainly been inaccessible for the majority of retail savers – the LTAF can be one of several building blocks in making the potential for improved returns more widely available.”
Melville Rodrigues, head of real estate advisory at Apex Group, who recently set out some of the practical considerations of setting up an LTAF, welcomed the policy statement and said it would “facilitate LTAFs having a transformational UK fund effect”.
He said: “The FCA has helpfully indicated that, in addition to DC pension and other institutional investors, LTAFs can be promoted to high-net-worth investors. In anticipation of positive outcomes of the LTAF-related DWP and Treasury consultations expected soon, interested managers should progress strategic plans to launch LTAFs. In particular, LTAFs will be able to attract substantial DC pension productive-finance capital.”
Richard Stone, CEO of the Association of Investment Companies (AIC), which has previously been critical of open-ended property funds, warned: “Following publication of the FCA’s policy statement today, a number of our concerns remain.
“In particular, we fear the 90-day redemption notice periods will not prove sufficient, particularly in times of stressed markets. If too short, this could threaten the long-term resilience of the LTAF. It will be a challenge for managers to set adequate notice periods, especially if the structure also incorporates leverage. It is difficult to see how investors can be assured there won’t be a run on an LTAF’s liquidity when market sentiment turns negative.
He added: “We are still waiting for the results of the FCA’s consultation on open-ended property funds even though it closed nearly a year ago. This shows how difficult it can be to address flaws once a product has been established. We need to be certain this won’t leave LTAF investors with similar long-term problems.”
