What is a long-term asset fund (LTAF)?

The long-term asset fund – or LTAF – may be unfamiliar to many UK investors because the concept is new. But the requirement for this type of long-term vehicle has long been noted and now, supported by the Government and investment community, it is becoming a reality.

LTAF in a nutshell

LTAFs offer long-term investors access to a wide range of assets, including private market investments, which have until now been available only to a minority of investors. The LTAF will offer new investment opportunities and choice to a bigger group. The wider economy will benefit as LTAFs should also bring fresh capital into important new projects such as infrastructure.

What is meant by “private market” investments?

“Public” investments include company shares traded on a publicly available stock market, which can change ownership by the minute. By comparison, private investments are not publicly traded and change hands less often. Examples of private market investments could include renewable energy infrastructure such as onshore and offshore windfarms. But they also include investments in many sectors, including younger businesses in disruptive areas such as fintech, life sciences and artificial intelligence.

Why are LTAFs being introduced?

The UK Government has been supporting greater investment in private market assets for some time, but the project was given specific support in November 2020 when the Chancellor of the Exchequer committed to the launch of LTAFs. The goal is to foster long-term economic growth and drive more capital into unlisted UK companies and infrastructure. At the same time, it broadens options for investors looking to build their retirement pots. It replicates a similar initiative in the EU, where European long-term investment funds (ELTIFs) are being developed.

How will an LTAF work?

The LTAF will be an “open ended” fund, meaning it can grow to accommodate new investor demand by issuing new “shares”. It will also enable investors to withdraw their money, by cancelling shares, according to agreed rules. The shares in the fund will reflect the value of the fund’s holdings.

The fund’s liquidity – the ability to raise ready money in order to meet investors’ potential withdrawals – will be carefully managed. Investors will be able to buy into, or sell out of, the fund, at longer intervals than traditional open ended funds which deal daily.A portion of an LTAF’s assets may, for example, be in listed assets which can be sold more quickly and where a price is more readily available. The rest may be private assets which take longer to sell, or liquidate. The mix and nature of the assets will determine how often investors will be able to buy or sell the fund.

Mirroring this, there are rules to govern the frequency with which the fund’s investments, including private assets, are valued.

What are the benefits of investing in private assets?

Until relatively recently “private assets” meant mostly private equity and real estate. But over the past 15 years, there has been an expansion into new areas, with much greater use of private debt and infrastructure.

Private assets, as part of a diversified investment strategy involving a range of assets (a multi-asset approach), can bring improved risk return dynamics to a portfolio.

There are three key reasons for this:

Reason 1 - Breadth of opportunity

Private markets give investors access to opportunities not available in public markets. The UK government estimates that there are approximately 35,900 medium sized businesses in the UK (50 to 249 employees). There are however, only around 1,900 companies listed on the London Stock Exchange.

Evidence also shows that companies are staying private for longer, or choosing not to list at all. By not allocating to this asset class a huge investable universe is being excluded.

Reason 2 - Enhanced returns
Past performance suggests that private markets have outperformed public markets over the long term. This is driven by the illiquidity and complexity premiums found in the asset class. While past performance is no guide to future returns, we believe the depth of the market and manager skill will continue to drive this trend.

Reason 3 - Active ownership

Private assets are typically owned by a smaller group of investors, in contrast with listed companies, which are held in minority by a much wider pool. As a result, private asset investors can more actively influence a portfolio asset not only to be more operationally efficient, but positively aligned to environmental and social goals.