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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.
[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”
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.
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.
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