Fri, May 7, 2021
FCA Launches Consultation on Long-term Asset Fund (LTAF), Designed to Invest in Efficient Long-term Illiquid Assets, and Works on Liquidity Mismatch in Open-ended Property Funds
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LTAF
A new category of fund designed to invest in long-term, illiquid assets has been proposed by the FCA. New open-ended funds able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure (often referred to as productive finance) have been proposed in a consultation launched by the FCA. The LTAF will be designed to provide investors with a fund structure to invest with appropriate confidence in relatively illiquid assets, potentially enabling greater levels of investment and economic growth by providing businesses with greater long-term capital.
While investors can currently invest in these kinds of assets through closed-ended structures, some investors may prefer to invest in open-ended funds with the opportunity to take money in or out at the net asset value of the assets. The FCA has suggested that LTAF rules embed longer redemption periods, high levels of disclosure and specific liquidity management and governance features to account for the different types of risk LTAFs might be exposed to.
The FCA has convened the Productive Finance Working Group alongside Her Majesty’s Treasury (HMT) and the Bank of England to ensure the wider ecosystem can operationally support the LTAF as a non-daily dealing fund, laying the groundworks for similar funds in the future, and is expected to draw its conclusions in July 2021.
Open-Ended Property Funds
In August 2020 the FCA published its consultation paper making suggestions to reduce harm to investors from liquidity mismatches within open-ended property funds.
This risk of harm occurs because the terms for dealing in the units of some property funds are often not aligned with the time it takes to buy or sell the properties that the funds invest in. This creates a liquidity mismatch between the redemption terms offered to investors and the fund’s assets. The FCA proposed a notice period of 90 to 180 days to be introduced to redeem these funds in order to address this issue.
The FCA sees a number of benefits to this proposal:
- Reducing the risk of investors being misled by an offer of daily redemptions that is not feasible
- Reducing the risk of potential pressure to sell fund assets quickly
- Enabling funds to hold less cash to manage the liquidity mismatch, which could result in larger returns for investors
The FCA received feedback from a variety of stakeholders, such as life assurance providers and fund managers. Concerns were raised regarding the challenges for firms if there is a lack of infrastructure to support the notice periods.
The FCA will continue to work with stakeholders and is considering the feedback and the operational challenges raised in supporting notice periods. The FCA will not take a final decision until Q3 2021 at the earliest. If the regulator does apply notice periods, a suitable implementation period will be allowed, for instance,18 months to two years, to allow firms to make the required changes.