By Neil Coxhead (pictured), Waystone – On 7 May 2021, the Financial Conduct Authority (FCA), unveiled plans to create a new regime with the specific aim of channelling investment into more illiquid assets, giving asset managers a hint of how UK fund regulation will develop after Brexit.
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By Neil Coxhead (pictured), Waystone – On 7 May 2021, the Financial Conduct Authority (FCA), unveiled plans to create a new regime with the specific aim of channelling investment into more illiquid assets, giving asset managers a hint of how UK fund regulation will develop after Brexit.
The Long-Term Asset Fund (LTAF) is intended to offer investors access to alternative asset classes, such as venture capital, private equity, private debt, real estate and infrastructure, therefore providing an alternative to open-ended funds that invest in illiquid assets.
A working group composed of the FCA, the Treasury, the Bank of England and representatives from the funds industry is currently looking at changes to UK fund rules to help support the development of the LTAF. The FCA says the findings of the working group, which is expected to report its conclusions in July, “could lay the ground for other similar funds in the future.”
The background
The LTAF was first proposed in June 2019 in the Investment Association’s Vision 2020 report and has been proposed specifically to offer investors access to alternative asset classes that have previously been almost exclusively available to professional investors. Distribution of the product is intended to be limited to professional investors and sophisticated retail investors at first, with defined contribution pension funds a key objective, given the long-term investment horizons of such schemes.
It’s clear that the UK Government and regulators wish to seize an opportunity to achieve several of their key objectives with the creation of the LTAF and the Chancellor of the Exchequer, Rishi Sunak, has set an ambitious timeline to have the first LTAF launched in the market by the end of 2021.
As the UK emerges from the challenges of both Brexit and COVID-19, the UK Government is looking to ‘level up’ economic growth across the country, increase investment in infrastructure, property and debt, always with a view to ‘building back greener’. For policymakers, being able to direct the large amounts of capital sitting in defined contribution pension pots towards these longer-term asset classes has been a long-term goal. The LTAF could be an example of a single initative that may help achieve these objectives.
The benefits for managers are clear; an expanded investor base and increased sources of capital, with the potential to increase AUM. The main challenge will be finding a suitable structure, whether this is a fund vehicle or an alternative investment platform that is suitable for retail investors. An additional challenge will be finding distributors to bring the product to market.
Among the UK’s authorised fund range, the LTAF has a key distinguishing feature. LTAFs will not be dealing daily, instead, they will give managers the option to align the funds’ dealing and redemption opportunities with the liquidity of underlying assets. Using the example of a private debt strategy, managers may choose quarterly or annual redemption opportunities to allow time to manage the flow of capital into and out of the fund. Consequently, investors would have more transparency in their investments, therefore avoiding more ‘Woodford’ situations.
What’s next?
With the recent announcement by the FCA of a consultation period, the momentum for the LTAF is certainly gathering. The Government hopes the LTAF will be launched before the end of 2021 and as such, the consultation period is relatively short, closing on 25 June 2021.
The Government and the FCA will take on board the feedback from both the consultation process and its ongoing work with the Productive Finance Working Group, which includes industry representatives.
There are several issues to resolve before the LTAF is launched, with the FCA’s consultation seeking feedback on themes such as:
- Fund governance and reporting
- Investor disclosures
- Eligible investors
- Eligible assets
- Investment powers
- Risk management
- Borrowing
- Tax
- Valuation
- Redemptions and subscriptions
- Due Diligence
- Costs and disclosures
- Authorisation timescales
Waystone encourages interested parties to provide feedback to the consultation, either directly or indirectly or through relevant trade bodies such as the Investment Association. A link to the FCA’s consultation is here.
The role of the Authorised Corporate Director (ACD)
Whilst the role of the ACD is expected to evolve in line with the proposed structure of the LTAF, we expect there will be various specific governance requirements that will need to be fulfilled over and above the requirements for other types of UK authorised funds, including:
Annual assessment of valuations, due diligence, conflicts of interest and liquidity management – LTAF managers will be required to conduct an (at least) annual assessment of how it has managed the LTAF in the best interests of the LTAF, its investors, and the integrity of the market. For example, how the valuation methodologies maintained by the manager represent good market practice (if the manager performs the valuation function itself rather than appointing an external valuer) and how the liquidity profile of the LTAF has been consistent with its redemption policy.
Expansion of senior management responsibilities – The senior manager responsible under SMCR for the prescribed responsibility relating to authorised funds will be responsible for ensuring that the authorised fund manager manages the LTAF in the best interests of the fund, its investors and the integrity of the market, that an annual assessment of value is carried out and that there are enough independent directors on the board.
Quarterly reports – In addition to the half-yearly and annual reports required for authorised funds, an LTAF will also be required to report quarterly to its investors on the investments in the portfolio, transactions undertaken during the period and any significant developments in the investments of which the investors should be aware. This report must be published no more than 20 business days after the end of each quarterly reporting period.
Appointment of an external valuer – LTAF managers must appoint an external valuer to perform the valuation of an LTAF, unless (i) the LTAF manager has the knowledge, skills and experience necessary to be able to carry out a proper and independent valuation of the assets and types of assets which the long-term asset fund holds or is to hold, and (ii) the depositary has determined that the LTAF manager possesses such knowledge, skills and experience.
Monthly valuations – Notwithstanding the flexible dealing frequency, the LTAF‘s assets must be valued at least monthly and that price published.
The Waystone proposition
Waystone is very encouraged by the UK Government’s desire to ensure that the UK remains a world-leading location for asset management and with an industry that can serve investors’ diverse needs. The success of the LTAF depends on a well-designed regulatory regime and on all parties understanding the new vehicle, its benefits and drawbacks.
As the leading provider of institutional governance, risk and compliance services to the asset management industry and acting in its capacity as an Authorised Corporate Director (ACD) for UK-regulated funds, Waystone is well-placed to ensure managers are able to seize the opportunities provided by the creation of the LTAF.
Our experience of supporting funds investing in alternative assets in domiciles such as Ireland and Luxembourg will provide clients with the assurance that they will be working with a provider that understands both the dynamics of the asset class and the UK funds regime.
If you would like to discuss further the possibilities of the LTAF and find out more about how Waystone can assist you when it goes live, please contact our ACD team here.
