Long-term asset funds were first heralded by the then Chancellor Rishi Sunak in November 2020, as part of his plans for the post-Covid recovery — although much of the groundwork for these new investment vehicles had been done before the pandemic.
In a statement to Parliament at the time, Sunak said: “To encourage UK pension funds to direct more of their half a trillion pounds of capital towards our economic recovery I’m committing to the UK’s first Long-Term Asset Fund being up and running within a year.”
It was hoped that LTAFs would encourage investment in UK plc while also delivering better returns for DC members — with a 2019 study by the British Business Bank and consultancy Oliver Wyman suggesting pension savers were missing out on greater returns by under-allocating to alternative assets.
And although half a trillion pounds remains rather ambitious for now, asset managers, large single employer trusts and to a degree master trusts have begun to embrace the concept.
Regulatory changes
Regulators began working on the relevant regulations governing LTAFs, and bringing some limited flexibility to the price cap between 2021 and 2023.
LTAFs are regulated as Alternative Investment Funds and expected to include at least 50 per cent long term, illiquid assets.
The rules require LTAFs to permit redemptions no more frequently than monthly, and to have at least a 90-day notice period, arguably placing them between closed and open-ended funds in terms of structure. Defined contribution funds and Sipps are able to invest up to 10 per cent of their assets in these vehicles.
The creation of LTAFs came with adjustments to the regulations concerning the 0.75 per cent price cap. Pension scheme trustees are effectively allowed to exempt the performance-based element of investment management fees from annual charges.
One final but significant detail was confirmation in October 2023 that LTAFs, after some debate and consultation, will be covered by the Financial Services Compensation Scheme.
Outside of the cap discussion, it was the retail market’s “sophisticated investor” component of the reform that attracted most controversy, with the Association of Investment Companies chief executive Richard Stone describing these funds as an accident waiting to happen in late October 2022.
He did not mince his words, saying: “We believe selling Long-Term Asset Funds (LTAFs) to retail investors is an accident waiting to happen. As the experience of daily-traded property funds shows, the industry has a poor record of safely making illiquid assets available to consumers within open-ended funds. LTAFs are likely to repeat these failings, as minimum notice periods will not prevent liquidity mismatches which will be particularly harmful to retail investors.”
Stone has also made reference to the well-documented problems with former star fund manager Neil Woodford’s funds, which had significant exposure to unlisted assets. His flagship equity income fund was forced to shutter amid withdrawals and liquidity issues in 2019.
In the workplace arena, most corporate advisers emphasise that schemes do need to be focused on liquidity mismatches. They are generally in favour of this development and want to see |more choice and better access to LTAFs, particularly through larger master trusts.
New fund launches
Over the past year there has been a number of LTAF launches and launch announcements; some of these have been supported by government capital, and some involve conversions of existing vehicles to this new format.
Schroders has launched two LTAFs and has another in the pipeline, which has raised capital from a range of sources including the British Business Bank.
Tim Horne, head of UK Defined Contribution, at Schroders says: “LTAFs are regulated, open-ended investment vehicles designed to enable a broader range of investors with longer-term horizons to invest efficiently in illiquid and private markets. Their structure is particularly suitable for the UK defined contribution (DC) and UK charities markets, providing savers with access to a previously untapped opportunity, as well as through defined benefit (DB) pension schemes.
“Opportunities for UK DC savers to benefit from the returns private assets can bring have traditionally been very limited. The launch of our LTAF range is enabling investors to take advantage of the diversification and performance private assets can deliver, as well as the sustained momentum now being directed towards the global transition to net zero and green economies.”
And it does appear that schemes are looking to embrace the concept.
In a recent survey, the Defined Contribution Investment Forum (DCIF) examined the attitudes of 11 master trusts and 10 single employer trusts towards investing in private markets.
It found that 42 per cent of those interviewed already invest in illiquid asset classes, and 28 per cent are actively planning to do so. Only 9 per cent said they are not planning on doing in the next three to five years.
Among those investing or planning to invest in private markets, the majority favoured private equity (32 per cent), followed by private debt (25 per cent) and infrastructure (20 per cent) with 20 per cent for impact solutions and just 16 per cent for property.
The report found that absent other constraints, 61 per cent would prefer to invest via an LTAF.
It also included two (non-attributed) quotes from corporate schemes which set out the context and attitudes generally. One said: “Asset managers need to create more funds, and LTAFs are a great opportunity; the industry needs a mixture of different asset allocations and a simple way to work on a platform. We are comfortable with monthly dealing, but even quarterly dealing is fine.”
A second scheme added: “Previously, lack of platform capability, a lack of available products and liquidity were barriers preventing our DC trust from investing in private markets, but these have all been overcome.”
But while schemes are broadly positive about this market development, some concerns remain, with more than two thirds (68 per cent) identifying high fees as a potential barrier.
Platform barrier
Talking to corporate advisers, it is interesting that they identify the underlying administrative platforms upon which master trusts sit as one potential obstacle and suggest that for now perhaps only two can facilitate these structures.
Stephen Budge, partner, DC Investment Consulting at LCP, which advised the HSBC Bank UK scheme on its embrace of LTAF, says: “We’re seeing most interest in multi-asset private market LTAFs so covering a range of asset classes within private markets. Most interest has come from sponsored schemes. However, some master trusts have progressed investment also. For example, the Cushon Master Trust has invested in the Schroders Climate+ LTAF.
“There is growing interest from master trusts in single sleeve LTAFs but we are still waiting for these to become authorised. Our clients appointed or reviewed mandates covering over £1 billion in private market assets for DC schemes during 2023 — a real milestone for LCP and the industry more generally.”
Discussing benefits and drawbacks, he says: “The benefits are that LTAFs invest in at least 50 per cent less liquid investments which have typically been off limits or out of reach to DC pension scheme members. These include asset classes that can offer new diversification opportunities particularly across growth markets.
“LTAFs do come with drawbacks, given they invest in private markets which have less frequent valuation and investors have less ability to trade in and out of the funds. Given they are investing in private markets, they are also likely to come with lock-up periods and controls on exit, to protect remaining investors in the funds.”
He says that the main bottleneck is with investment platforms as the gatekeepers to pension scheme investments. “The vast majority of schemes use investment platforms to invest their member savings, so the lack of LTAFs on these platforms stop pension schemes from investing even if there is interest. We’re expecting a huge growth in these funds but without platform support, it will slow investment. The Government has made it quite clear that it sees private market investment, particularly into the UK, as an essential element for delivering value for members.
“Our view is that these types of assets will become more commonplace in the future and hence, without these choices on a platform/availability through master trusts, they might be perceived to be lacking in this area compared to others.”
Ben Lewis, investment strategy lead, DC Solutions, at Mercer says that it is important to be mindful of performance and indeed of the appropriate structure of LTAFs. “We expect that DC investment in illiquid assets will increase substantially in the coming years and the LTAF will have a significant role to play in facilitating that. The key benefit of LTAFs is providing access to illiquid assets that have historically been under-represented in DC portfolios.
“Selecting an LTAF that is appropriately structured will be vital. The difference between the performance of the best and worst-performing asset managers will likely be significant and investors need to be completely comfortable that the liquidity terms of the LTAF aligns with the underlying investments.”
He says platforms are beginning to upgrade to accommodate LTAFs as well. “We expect that LTAFs will likely become the vehicle of choice for illiquid assets in DC, particularly given the clear steer of the FCA as their chosen vehicle. We also note the positive momentum from platform providers in upgrading their capabilities to deal with non-daily dealt assets.”
Syndaxi Financial Planning director Robert Reid says: “This is an emerging segment of funds and may well offer opportunities. I want to see these funds scrutinised, risk-rated and to see strong communications around any instances where fees are elevated.
“This structure is available to DC schemes and sophisticated investors, but I would question whether that means they will see the same scrutiny as funds that are available across both retail and workplace segments.”
BOX: Launches and announcements
March 2023 Schroders announces the launch of the Schroders Capital Climate+ LTAF, a diversified multi-private assets fund, partly drawing on the expertise of its impact investing specialist Blue Orchard.
March 2023 BlackRock gains regulatory approval for its Diversified Alternative Strategies fund with a blend of private equity, private credit, infrastructure and property.
May 2023 Aviva Investors launches a Real Estate Active LTAF (REALTAF) which includes an “active equity” real estate investment strategy investing in high-conviction locations and emerging themes including London’s Hoxton, for example, seeded with £1.5bn from the Aviva with-profits fund.
February 2024 Schroders launches the Greencoat Global Renewables+ Long-Term Asset Fund (LATF) focusing on renewable energy and the climate transition.
March 2024 Aviva Investors converts its Climate Transition Real Assets Fund (CTRAF) to an LTAF structure.
March 2024 The HSBC Bank Pension Scheme incorporates its DC default investment strategies by partnering with Fulcrum Asset Management to create a multi-asset private markets LTAF.
March 2024 Schroders Capital announces it intends to launch a UK venture and growth Long-Term Asset Fund (LTAF), subject to regulatory approval, seeded with a cornerstone investment of £150 million from the British Business Bank matched by £150m Phoenix Group.
March 2024 Alternative fund manager ICG confirms that the British Business Bank will provide £100m into ICG Life Sciences strategy. Phoenix Group again joins as co-anchor with a £100m commitment.
The two investments come as part of the UK Government’s Long-term Investment for Technology and Science (LIFTS) initiative.