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UK Prepares For "Long-Term Asset Fund"

The fund structure is being mooted while demand for illiquid, higher-yielding assets remains strong. However, this is happening alongside ultra-low interest yields and sometimes lacklustre returns from conventional retail savings and investment products.
The Financial
Conduct Authority is consulting the investment industry with
regard to the possibility of creating a fund for holding illiquid
assets. This would tap into the idea of getting more people to
enter assets such as private equity and credit.
The regulator envisages that such funds would be open-ended,
enabling investors to invest in assets such as venture capital,
private equity, private debt, real estate and infrastructure,
often referred to as productive finance.
There has been a trend of investment industry figures talking
about “democratising” access to non-public assets. With such
investments offering superior yields to equities and bonds in a
world of ultra-low interest rates, there has already been an
influx into the area from high net worth and professional
investors. (In the US, the Securities and Exchange Commission has
tweaked the Accredited Investors regime to widen access.) For
retail investors, however, illiquid assets are often off-limits.
The FCA is mindful of how open-ended property funds hit problems
in 2016 when the Brexit referendum result was announced,
triggering a rush of pull-outs.
“The aim of this new long-term asset fund (LTAF) 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 FCA said.
“These illiquid assets can offer attractive expected returns to
investors. If successful, the existence of funds investing in
these assets can also help businesses and infrastructure projects
have greater access to long-term capital to support investment
and wider economic growth,” the FCA continued.
Last year, Rishi Sunak, the UK Chancellor of the Exchequer,
committed the government to the idea of launching an LTAF
structure within a year.
“Investors can already invest in such assets through closed-ended
structures, or a range of private structures. But some investors
prefer investing in open-ended funds where there are
opportunities to put money in or take it out at the net asset
value of the assets. However, as seen with property funds,
open-ended structures investing in illiquid assets can face
problems if they offer daily dealing to investors,” the FCA
said.
The FCA proposes that LTAF rules embed 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 help give investors
confidence that they are being managed appropriately and in their
interests,” it said.
As well as aiming the LTAF at “experienced retail investors,” the
new fund would also be targeted at defined contribution pension
schemes, the regulator said.
‘It is important for overall economic growth that the financial
system supports investment that may take time to deliver a
return. This is in addition to the potential benefit to investors
themselves. We think our proposals would enable the establishment
of authorised funds that are appropriate for both professional
investors and sophisticated retail investors that want this type
of investment risk and opportunity,” Nikhil Rathi, chief
executive of the FCA, said.
The consultation runs until 25 June this year.