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Update on Long-Term Asset Funds in the UK

Insight 16 November 2021

Update on Long-Term Asset Funds in the UK

Market interest in alternative illiquid assets has grown in recent years. A combination of more volatile, consolidating public markets, lower interest rates and superior returns generated by asset classes such as private equity and real estate, have attracted the attention of investors – and regulators.

This is especially true in the context of the aging of population and the need for pension funds to generate returns over a long-term period, which becomes easier through open ended fund structures which generally allow assets to be held over a longer period of time than traditional closed-ended funds.

The Financial Conduct Authority (“FCA”) in the UK consulted on the creation of an open-ended fund regime which would allow key investors, mainly Defined Contribution (DC) pension funds, access into illiquid assets whilst balancing the challenges between such assets and investor liquidity needs. We discuss this in an earlier Sanne article on open-ended real estate funds. The outcome of the consultation was the release of a Policy Paper on the creation of the Long-Term Asset Fund (LTAF) regime.

Key features of an LTAF:

  • Authorised by the FCA
  • Open-ended
  • Must include Long-Term Asset Fund or LTAF in its name
  • Considered as an AIF and must be managed by full scope UK AIFM[1]
  • Must appoint a depositary, which will be the legal owner of the assets
  • Structuring options:
    • Unit Trust,
    • Investment Company with Variable Capital (“ICVC”),
    • Authorised Contractual Scheme (“ACS”), or
    • Limited Partnership
  • An LTAF can be authorised as a Property Authorised Investment Fund (“PAIF”)
  • An LTAF could change to become a qualified investor scheme, a non-UCITS retail scheme or a UCITS scheme, subject to certain conditions. The authorised fund manager of an LTAF may need to make significant changes to the LTAF’s constitution, objectives and investment powers for it to become a UCITS scheme or a non-UCITS retail scheme.
  • Subject to a new chapter 15 in the COLL Sourcebook

[1] Given the LTAF is an FCA authorised vehicle, AIFMs that currently only manage unauthorised AIFs will need to seek variation of permission to be allowed to “manage an authorised AIF”

  • Distribution limited to high-net-worth individuals, sophisticated and professional investors
  • Redemptions no more often than monthly
  • At least 90 days’ notice for investor redemptions
  • Public disclosure required on management of conflicts of interest
  • Quarterly reports due within 20 days
  • Half-yearly reports due within 2 months
  • Annual reports due within 4 months
  • FCA support for disclosures in line with the Cost Transparency Initiative (“CTI”), although this is not an obligation
  • Valuations to be carried out at least monthly
  • Expectations of more than 50% investment in unlisted securities or long-term assets[2]
  • 30% maximum borrowing limit (based on net assets). This limit does not apply to underlying assets.

[2] Of funds investing in such assets

Permitted links:

DC pension funds are one of the main targets of the LTAF and as such, the LTAF will be exempted from the 35% cap limit on illiquid investments normally subject to unit-linked funds.

Next steps:

  • The FCA noted the requirement for a depositary to register assets in its own name may cause an issue with illiquid assets, especially real assets. A consultation on this point is planned in H1 2022.
  • Another consultation is also planned for H1 2022, this time on allowing retail investors to invest in the LTAF.
  • The Handbook rules and guidance on the LTAF come into force on 15 November 2021.

Other developments:

It has been no surprise to see the UK Government’s desire to increase the attractiveness of the UK financial sector to private capital, in a post-Brexit landscape. The introduction of the LTAF framework should be read in parallel to some other developments such as a new tax regime for Asset Holding Companies (taking effect from 1 April 2022 and recently released as Schedule 2 to the Finance Bill 2021-22) and upcoming conclusions on the reviews of the UK Funds Regime and the VAT treatment on management fees, both expected to come out later this year.

The trend is clear, the UK is out to increase its profile as a domiciliation of choice for alternative assets.

How can Sanne help?

Sanne is a leading provider of alternative asset services. Our team has a proven track record in delivering the solutions required by our clients to support their investment structures, in an ever-evolving industry.

To discuss how Sanne can assist you or your business, please contact Chris, Simon or Paul directly.

Let's talk...

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Chris Warnes Head of Sanne United Kingdom - United Kingdom
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Simon Vardon Global Head of Real Assets - Jersey
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Paul Séjournant Associate Director, Product Development - United Kingdom
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