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LTAFs to unlock potential for higher yields from illiquid assets and benefit pension savers

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LTAFs to unlock potential for higher yields from illiquid assets and benefit pension savers

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In November 2021, the UK’s Financial Conduct Authority (FCA) authorised the creation of new open-ended Long Term Asset Funds (LTAFs). These should enable more investors to benefit from the higher yields associated with long-term illiquid assets. 

 

LTAFs can take the form of UK Unit Trusts, Open-Ended Investment Companies (OEICs) or Authorised Contractual Schemes (ACS). The ACS is a tax transparent fund and is equivalent to the Irish Common Contractual Fund. LTAFs are anticipated to be particularly attractive for private equity, private debt, venture capital investments, infrastructure and real estate assets. 

 

It is expected that LTAFs could address one of the key issues of regulated funds holding long-term assets; the liquidity mismatch between the underlying assets and the fund vehicle. LTAFs have access to more liquidity management tools than other fund structures and this, coupled with a minimum notice period of 90 days to redeem and dealing not allowed more frequently than monthly, gives investment managers more flexibility with regards to how to structure their portfolios. 

 

In addition, the allocation cap of 35% under “permitted links” has been removed for LTAF‑linked funds that form part of the default arrangement of a qualifying pension scheme. This is a major change for schemes that use life companies to provide investment options that could see more investment capital directed into long-term capital-intensive projects. At the same time, it could enable investors to capture more of the risk-premia associated with illiquid assets (above that normally found with listed equities and bonds).

 

The UK mini-budget in September included the intention to bring forward plans to have performance fees removed from the charge cap applied to defined contribution schemes in order to unlock pension fund investments into UK infrastructure and innovative, high-growth businesses. So, if this remains on the Government’s agenda for a growth economy, or is returned to in future, this may mean the LTAF creation is very timely.

 

 

Flexibility, diversity and tax transparency for pension schemes and asset managers

 

AMX by Carne’s institutional investment platform can allow us to work with investors to help maximise their returns from tax-efficient private markets, drawing upon the deep experience of Carne Group in managing private markets funds. 

 

Our platform can facilitate a UK vehicle (ACS) for private market investments within an LTAF. The LTAF ACS will abide by the FCA rules that emphasise the need for strong governance and risk disclosures (as well as rules limiting redemptions to a minimum of 90-days’ notice and dealing no more frequently than monthly). The LTAF ACS would preserve investors' own tax entitlement/treatment and is a familiar tax transparent structure and flow through entity to Institutional Investors.

 

Whilst initially focused on defined contribution pension schemes, the LTAF ACS may also be suitable for defined benefit and insurance investors.

 

If you would like to know more about how Carne can help you launch an LTAF, please get in touch.


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