The UK’s first LTAF

Schroders Capital has launched the UK’s first long-term asset fund, aimed at helping UK pension funds invest in illiquid and private assets to support a net-zero economy, writes Laraib Shahid.

Schroders Capital, the specialist private markets investment division, announced on March 29 the launch of the Schroders Capital Climate+ LTAF, a Long-Term Asset Fund designed to support the net-zero transition for UK pension fund investors.

This launch followed authorisation by the Financial Conduct Authority (FCA). The LTAF is an open-ended investment vehicle that allows a wider range of investors with longer-term horizons to invest efficiently in illiquid and private assets.

The FCA finalised the LTAF regime in November 2021 and is discussing improvements to it. The final rules for broadening access to LTAFs are expected to be published before the end of June.

Peter Harrison, CEO of Schroders, said the firm believes that “a wider range of UK savers must be able to take advantage of the robust returns and diversification benefits from investing in private assets” following the news of FCA approval.

The fund

Climate+ will focus on defined contribution (DC) pension fund schemes initially. Tim Horne, head of UK institutional defined contribution at Schroders, highlights the potential for UK DC investors to benefit from private assets, which have traditionally been limited.

The fund’s launch will enable investors to diversify and potentially benefit from private asset performance, as well as support the move towards a net-zero and sustainable economy.

The fund’s founding investor is fintech pension fund Cushon, which will allocate 15% of its assets to the LTAF. Julius Pursaill, Cushon’s strategic adviser, views this as a demonstration of pensions’ potential to support the transition towards a more sustainable economy.

The fund will have a three-year lock-up period to align with its ramp-up period, and investors will be able to withdraw 5% of the fund’s total net asset value quarterly. The fees for the strategy will be a standard flat rate of 1.25%, with no performance fee.

“A wider range of UK savers must be able to take advantage of the robust returns and diversification benefits from investing in private assets” 

Schroders intends for Climate+ to have a positive impact on climate change by investing in private assets that support the transition towards a net-zero economy.

David Seex, head of private asset solutions at Schroders, emphasises the importance of private assets in financing the necessary transition towards a more sustainable future while providing pension savers with the opportunity to participate in this change and generate sustainable returns in their retirement pools.

Climate+ aims to provide a diversified multi-private asset portfolio of investments that target adapting and mitigating climate change. The fund’s administrators are JP Morgan and HSBC.

Horne views the launch of this strategy as a testament to Schroders’ focus on meeting investor needs in this space, as the fund was launched quickly after receiving regulatory approval. The strategy will operate a liquidity management framework focused on managing excess cash and investing in more liquid assets.

Portfolio overview

The diversified multi-private asset strategy aims to allocate 70-95% of its assets in global (ex-emerging) markets, 30-50% in the UK and Europe and 15-25% in emerging markets. The strategy targets net returns of 8-10% annually.

The fund will allocate 20-40% of its assets into private equity with a globally diversified exposure, including emerging and frontier markets, Schroders says.

Infrastructure allocations, also of 20-40%, will be asset-backed, offering “strong and predictable cash flows”, says Schroders. The allocations have a global exposure with an overweight to Europe.

Real estate and natural capital will see 10-25% allocations each, with the former being targeted at Europe while the latter will have overweight to the US.

The fund will also allocate 5-20% to liquid climate impact globally to provide the strategy with flexibility for managing inflows and outflows.

Four pillars of the strategy

The fund aims to invest across four long-term themes dubbed ‘pillars’: climate mitigation, climate adaption, biodiversity/natural capital and social vulnerabilities.

Schroders says the climate mitigation pillar is about limiting or preventing greenhouse gas emissions. It is a solution-oriented approach that can be applied across all sectors and activities.

The second pillar is the adjustment process to “actual or expected climate and its effects”. It takes a resilience-focused approach categorised as structural, institutional, ecological or behavioural adaptation, says the firm.

The natural capital and biodiversity pillar is the “world’s stock of natural resources”, including soil and water. This approach is about a human-based intervention to enhance greenhouse gas sinks or increase protection from weather-related events.

Finally, the social vulnerabilities pillar relates to people’s exposure because of the impacts or mitigating actions of climate change. The approach will strive for a just transition towards net zero, focusing on opportunities to address inequality, says Schroders.

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