What is an LTAF?

An LTAF is an open-ended collective investment fund designed to hold long-term, unlisted and illiquid assets. The FCA published its final rules in June 2023.

Until now, retail access to these assets has been limited to products like EIS, VCTs and unlisted Business Relief portfolios. Even then, the clients using them are hardly your average retail investor. As a result, the strong long-term growth potential of private markets has been out of reach for most.

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What can an LTAF invest in?

Most client portfolios today are built from listed assets (equities, bonds and ETFs) held in OEICs and unit trusts. LTAFs widen the scope considerably, as the usual liquidity rules don't apply. That brings into play:

• Private equity and venture capital

• Private credit

• Private infrastructure

• Real estate

Crucially, LTAFs can be structured as OEICs, unit trusts or Authorised Contractual Schemes (ACS), so they're much easier to distribute and access than specialist portfolios.

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Why LTAFs could strengthen diversification

Most retail portfolios have little or no exposure to private assets, so the potential for overlap with existing holdings is low. That offers some extra protection from wider market movements.

LTAFs also go further than existing illiquid options. Tax-advantaged portfolios such as EIS, VCT and BR are limited to early-stage UK companies, whereas LTAF managers can invest globally.

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Funding the companies shaping the future

LTAFs could direct significant money towards early-stage companies working in areas like green infrastructure (wind and solar farms, for example) and cutting-edge scientific research. These businesses are largely out of reach for traditional funds because of their illiquidity and higher risk.

With more clients expressing an interest in sustainable and impact investing, this could be a useful way to meet their preferences.

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The liquidity problem: lessons from property funds

Illiquid assets and open-ended funds don't always mix well, as some physical property funds have shown.

Commercial property is slow to buy and sell, particularly at its true market value. When redemptions exceed a fund's liquidity buffer, managers have to sell underlying assets. If they can't do that quickly (think selling a house versus selling shares), the fund has to "gate", leaving investors unable to access their own money.

With Consumer Duty now requiring firms to prevent foreseeable harm, the question is: what stops this happening again?

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How LTAFs manage liquidity risk

Restricted mass market investment (RMMI) status
LTAFs are classed as RMMIs, so they can only be promoted to certain retail investors under additional rules and controls, including extra risk warnings linked to the underlying assets.

A minimum 90-day notice period
Investors must give at least 90 days' notice to redeem. This needs careful thought in financial planning and may not suit every client, but it gives managers time to prepare for spikes in redemptions.

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Costs and Consumer Duty

Researching and monitoring unlisted companies is labour-intensive, so expect ongoing charges to be on the high side, especially next to the low-cost passive strategies popular with advisers right now. As more LTAFs launch, firms will need to assess whether the extra cost represents fair value under Consumer Duty.

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Who are LTAFs suitable for?

The limited liquidity and high risk will rule LTAFs out for many investors. They could, however, suit younger investors with a very long time horizon and a high capacity for loss. That's why they're being rolled out in selected DC pension schemes first.

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Where LTAFs stand today

Only a handful of LTAFs have launched so far, with short track records, and access is currently limited to certain DC pension schemes and institutional investors. That's likely by design, as the FCA and providers test the water before widening access.

Expect interest to grow significantly, along with more choice of providers, strategies and ways to hold them.

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What LTAFs mean for financial advisers

LTAFs open the door to private markets for retail investors. For advisers, they offer:

• Long-term growth potential

• A new range of assets beyond traditional equity and bond portfolios

• Greater diversification for client strategies

• Another route to meet sustainable and impact investing preferences

The trade-offs (liquidity, risk and cost) mean suitability and value assessments will be critical.

Key takeaways

• LTAFs are authorised open-ended funds built to hold long-term, illiquid assets such as private equity, private credit, infrastructure and real estate.

• They can be structured as OEICs, unit trusts or ACSs, making them far easier to distribute than existing routes into private markets.

• Low overlap with listed assets and a global investment remit offer strong diversification potential.

• A minimum 90-day redemption notice period and RMMI classification are designed to avoid a repeat of the property fund gating problems.

• Costs are likely to be high, so value will need careful assessment under Consumer Duty.

• Access is currently limited to selected DC pension schemes and institutional investors.

Want help researching LTAFs or other complex investments for your clients? our paraplanning team can support your due diligence and suitability work, and the good news is we love to chat – book a call today.