Regulation  

FCA launches illiquid assets fund with minimum 90-day notice period

FCA launches illiquid assets fund with minimum 90-day notice period

The FCA has launched an open-ended investment fund structure giving investors to access to infrastructure and private equity but with a notice period of at least 90 days. 

The long-term asset fund (Ltaf) is aimed at sophisticated investors and defined contribution (DC) pension schemes, to allow them to invest in illiquid or long-term assets.

Some high net worth individuals will also be able to invest and the regulator said it will consult next year on widening the distribution of the Ltaf to certain retail investors.

Ltafs, which will come into force on November 15, will invest mainly in long-term illiquid assets, and the funds must have at least 50 per cent of their assets invested in unlisted securities or other long-term assets. 

The FCA said investment in these assets had the potential to generate better returns for investors. It would also allow pension funds to diversify their portfolios further, whilst encouraging more investment into the economy.

Nikhil Rathi, chief executive of the FCA, said: “We are supporting fresh collaborative thinking designed to improve the effectiveness of UK markets while protecting standards. 

“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.”

Ltafs will allow investors to access private equity, private credit, venture capital, infrastructure, real estate, forestry and collective investment vehicles that invest in private asset classes.

They will also be able to hold cash, listed shares and bonds including money market instruments. 

Investors in Ltafs will be permitted to redeem their investments on a minimum of a monthly basis, and there will also be a minimum 90-day notice period for withdrawals.

Though the FCA said in practice, "we would expect that many Ltafs would have notice periods significantly longer than 90 days".

The FCA said this was to ensure there is a consistency between how long it will take to sell the assets and how often and quickly an investor will be able to sell out of the fund.

The regulator had previously mooted this idea for open-ended property funds, discussing potential notice periods of up to 180 days to solve the liquidity mismatch that has seen the funds gate for withdrawals at various points over the past 10 years due to flurries of redemptions amid economic uncertainty - for example due to Brexit or the uncertainty surrounding the Covid-19 pandemic.

Former Bank of England governor Mark Carney famously said funds which invest in illiquid assets but offer daily dealing were "built on a lie".

But the FCA said in May it would not confirm specific property fund rules until the Ltaf consultation has been completed and it has not outlined any further details to date. 

The concept of an Ltaf was first outlined by the Investment Association in 2019 as an open-ended fund structure designed specifically to facilitate investment into long-term, illiquid assets.