Sponsors should take steps now to ensure they’re equipped once the UK’s LTAF structure goes live, argues David Genn, CEO of alternatives tech provider Goji.
Private capital fund managers’ interest in the retail market has been well established. More recently, the percolating buzz around blank-check companies in Europe should confirm retail investors are just as eager to invest in alternatives.
Enter the Long-Term Asset Fund (LTAF). Billed as the UK’s answer to support innovation and allow retail investors to diversify beyond stocks and bonds, the LTAF bridges a pronounced disconnect between investors who require liquidity and asset classes whose returns are premised on exploiting an illiquidity discount. The LTAF should be greeted with fanfare, as wealth managers and DC plan sponsors have been angling for a way into “patient” capital for decades now.
But for private capital managers, the LTAF structure represents the most tangible opportunity to tap into a new, significant pool of investors in a material way -- a segment growing far faster than any other pool of capital. The caveat is that that long-term, “patient” capital by its nature favours first movers.
For the uninitiated, the LTAF is a variation of the Non-Ucits Retail Schemes (Nurs) wrapper, albeit far more flexible. Contributing to its adaptability are allowances for direct investments in limited partnerships; holdings in unlisted securities; extended borrowing capacity; and an initial investment period for managers to build a portfolio over time, among other features.
Most notably, according to the Investment Association, the LTAF is specifically designed to create alignment between the underlying assets and the appropriate liquidity required to accommodate potential redemptions, without sacrificing value through forced sales. This should appeal to alternative fund managers whether they’re overseeing private equity, real estate, private credit, fund-of-funds strategies, or other investments in illiquid assets.
Avoiding another Woodford
During periods of relative calm in the economy, illiquidity challenges aren’t as obvious. When markets turn, it can create a domino effect that makes it difficult to facilitate redemptions and degrades value for existing investors seeking to maintain their exposures.
Market watchers saw this play out when the Woodford Equity Income Fund was forced to shut down after the manager suspended redemptions following a string of losses and was unable to liquidate its portfolio.
The same issues were evident across the broader hedge fund universe roughly a decade earlier amid the Global Financial Crisis, and more recently, several real estate-focused mutual funds were shuttered amid the short-lived investor panic last March and April at the onset of the Covid pandemic.
The LTAF has rules around the buying and selling of assets at set intervals. In some cases, these guardrails may accommodate redemptions once every three months or, in other cases, it may be a year or longer. Again, it comes down to what’s appropriate for a given set of assets.
The question now facing investors is when the LTAF will gain approval from regulators. A working group established by the Treasury, the Bank of England and the FCA is aiming to fast track the implementation. According to the minutes of a January meeting, the working group expects to finalize the regulatory framework within six months. Parallel to these efforts, it will establish the operational infrastructure required to support and offer non-daily dealing funds across both intermediaries' distribution channels and other investment platforms. The government has committed to a 2021 launch.
While alternative managers have been flirting with retail for years, now that it’s within sight, sponsors should revisit their technological underpinning to ensure they can facilitate everything from onboarding and payments to custody and reporting for a far wider and more diverse audience than ever before. Even as the regulatory details are being finalized, technology is available today that will prepare managers to go live as soon as regulators give their green light.
Make no mistake, it will be a race. Retail clients represent the fastest-growing investor segment across asset management, growing assets under management by 19% in 2019, according to the Boston Consulting Group. And among global high-net-worth investors, Oliver Wyman’s base-case projects the segment’s total AuM to exceed $100 trillion (€84.1 trillion) by 2024.
Investment firms and fund administrators who are “LTAF ready” will be positioned to capture an outsized proportion of this growth.
David Genn is CEO of Goji
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