Overview: 

The UK Long Term Asset Fund (LTAF) was introduced by the Financial Conduct Authority (FCA) in October 2021 to enable investments in long-term, illiquid assets such as private credit, venture capital, private equity, real estate, and infrastructure. The framework is designed to support both institutional and retail investors while contributing to long-term economic growth. The initial rules and guidance came into force on 15 November 2021 and have been subject to further refinement to broaden access and enhance operational efficiency.

Key Features of the LTAF:

• LTAFs are open-ended funds that invest in long-term, illiquid assets such as private credit, VC, PE, RE and infrastructure
• LTAFs are required to invest more than 50% of the fund in unlisted securities and other long-term assets
• LTAFs are permitted to invest in loans
• LTAFs permitted to invest in other funds subject to some safeguards
• Distribution will be open to both professional clients as well as retail clients
• Borrowing set at 30% of net assets
• Only authorised full-scope UK AIFMs are permitted to manage an LTAF with LTAF managers also expected to meet additional requirements
• Minimum standards on redemptions, no more frequent than monthly and only after a minimum 90-day notice period;

Recent Developments:

Broadening Retail Access:

On 29 June 2023, the FCA published Policy Statement PS23/7 in response to feedback on their consultation paper concerning the broadening of retail and pension scheme distribution of the Long-Term Asset Fund (LTAF). The statement finalises rules for retail access to the LTAF, confirming its recategorisation from a Non-Mass Market Investment (NMMI) to a Restricted Mass Market Investment (RMMI).

This change requires risk warnings and summary texts for firms marketing LTAFs to retail investors. Consequently, LTAF distribution has been extended to mass market retail investors, self-select Defined Contribution (DC) pension schemes, and Self-Invested Personal Pensions (SIPPs).

Several changes have been implemented following the consultation, with key updates including:

• Risk Warnings: Adjustments to focus more on liquidity risks rather than investment risks.
• Fund-of-Funds Exposure Limits: Non-UCITS Retail Scheme Fund of Alternative Investment Funds (NURS FAIF) can now invest up to 35% of its scheme property in a single LTAF. Additionally, NURS FAIF can allocate more than 50% of its scheme property to LTAFs if it operates limited redemption arrangements to manage liquidity.
• Valuation Rules: Third-party valuation requirements have been aligned with the standards for NURS.
• Retail Investor Protections: Enhanced rules include provisions for unitholder engagement on significant fund changes, arrangements for unitholder meetings, maintenance of a unitholder register, regular investor updates, and restrictions on payment types and charges.

Changes to Pension Distribution Requirements:

• Non-advised investors can now access long-term unit-linked products, including non-workplace schemes and non-qualifying workplace schemes.
• The 35% restriction on illiquid assets in unit-linked fund structures within the default arrangement of a qualifying scheme has been removed.
• Consumers holding LTAFs in self-selected pensions or SIPPs will receive notifications regarding the illiquid nature of their holdings as they approach retirement age.

The new rules took effect on 3 July 2023, with a transitional period until 3 July 2024.

Widening Access for NURS:

On 6 September 2024, the FCA issued a consultation proposing amendments to improve NURS access to LTAFs. Key proposals include:

• Simplified Rules: Exempting LTAFs from the 15% cap on investments in other collective investment schemes (CIS), allowing greater flexibility for NURS managers.
• Maintained Guardrails: Retaining the 20% limit on overall LTAF exposure within a NURS portfolio to manage risk.
• Investor Protections: Introducing provisions to ensure NURS managers can meet redemption obligations, mitigating liquidity risks associated with LTAFs.

Model LTAF Documentation:

On 11 October 2024, Simmons & Simmons, in collaboration with the Productive Finance Working Group (PFWG), published updated model documents for LTAFs, including the Instrument of Incorporation and Authorised Contractual Scheme (ACS) Co-Ownership Deed. These updates aim to standardise the structure and simplify the establishment of LTAFs.

The models are publicly available, and can be downloaded here; Model Instrument of Incorporation for LTAF | Model ACS Co-Ownership Deed for LTAF.

Looking Ahead:

The FCA’s continued efforts to refine the LTAF framework are expected to attract more investors and unlock the potential for long-term investments in illiquid assets.

For Further Information:

Please contact Nicholas Smith ([email protected]) for additional guidance on LTAF-related matters.

(Last updated: December 2024)