The investment landscape is evolving with the introduction of new fund structures designed to channel more capital into long-term, illiquid assets. In the UK, the Long-Term Asset Fund (LTAF) and in the EU, the European Long-Term Investment Fund (ELTIF) are paving the way for broader investor access to private markets and infrastructure investments. These innovative structures aim to democratize access to alternative investments while supporting economic growth and development.
The UK's Long-Term Asset Fund (LTAF)
Introduced in 2021 by the UK's Financial Conduct Authority (FCA), the LTAF is a new category of open-ended authorised fund designed to invest efficiently in long-term, illiquid assets.
Key features of LTAFs include:
- Structure: Can be structured as an authorised contractual scheme (ACS), authorised unit trust (AUT), or open-ended investment company (OEIC)
- Eligible investors: Professional investors, DC pension schemes, sophisticated investors, and high net worth individuals
- Investment focus: At least 50% of assets must be invested in long-term illiquid assets
- Investment flexibility: Can make direct investments and invest in other funds, including unregulated collective investment schemes
- Borrowing limit: Up to 30% of net assets
- Redemptions: No more frequent than monthly with a minimum 90-day notice period
- Valuation: Requires appointment of an external valuer
Recent developments:
- Schroders Capital received approval for the UK's first venture capital-focused LTAF
- LTAFs can be held within Innovative Finance ISAs from April 2024
- Retail access has been broadened, including to self-select DC pension schemes and SIPPs
The EU's European Long-Term Investment Fund (ELTIF)
Originally introduced in 2015, the ELTIF framework was recently updated with "ELTIF 2.0" coming into effect in January 2024. This revision aims to make ELTIFs more attractive to both investors and fund managers.
Key features of ELTIF 2.0 include:
- Structure: Closed-ended fund regulated under EU legislation
- Eligible investors: Both retail and professional investors across the EU
- Investment focus: Long-term investments in the EU economy, with broadened scope under ELTIF 2.0
- Investment flexibility: Can make direct investments and invest in other EU Alternative Investment Funds
- Borrowing limit: Up to 50% of NAV for retail-marketed ELTIFs, 100% for professional-only ELTIFs
- Redemptions: New provisions for optional liquidity windows and secondary market trading
- Valuation: Aligned with AIFMD requirements
Recent developments:
- Expanded eligible assets including green bonds, fintechs, and global investments
- Removal of minimum investment amounts for retail investors
- Introduction of master-feeder and fund-of-funds structures
Investment Strategies
Both LTAFs and ELTIFs offer flexibility in their investment approaches:
1. Direct Investments: These funds can invest directly in long-term, illiquid assets such as private equity, venture capital, real estate, and infrastructure projects.
2. Fund of Funds: They can also invest in other funds, allowing for diversified exposure to multiple strategies or sectors.
This dual approach allows fund managers to create diverse portfolios tailored to specific investment objectives while providing investors with access to a broad range of long-term investment opportunities.
Shared Objectives and Benefits
Both LTAFs and ELTIFs aim to:
1. Provide investors with access to potentially higher returns from illiquid assets
2. Offer portfolio diversification opportunities
3. Channel capital into long-term projects and the real economy
4. Align with long-term investment horizons, particularly for pension funds
5. Provide a regulated structure with investor protections
Economics
While specific fee structures may vary, both LTAFs and ELTIFs typically involve:
- Management fees: Usually around 1-2% of assets under management
- Performance fees: May be included, subject to regulatory guidelines and disclosure requirements
- Carried interest: Common in private equity-style investments, typically around 20% of profits above a hurdle rate
Investors should carefully consider the total cost of ownership, including all fees and expenses, in the context of potential long-term returns and diversification benefits.
Looking Ahead
The success of LTAFs and ELTIFs will depend on how well they balance investor protection with flexibility for fund managers. As these structures evolve, they have the potential to play a significant role in democratizing access to private markets and supporting long-term economic development.
For investors, these funds offer new opportunities to diversify portfolios and potentially enhance long-term returns. However, it's crucial to understand the risks associated with illiquid investments and the specific terms of each fund.
For fund managers, LTAFs and ELTIFs present opportunities to tap into new sources of capital and offer innovative products to a broader investor base. The ability to employ both direct investment and fund of funds strategies provides additional flexibility in portfolio construction and risk management.
As the investment landscape continues to evolve, LTAFs and ELTIFs represent important innovations in connecting diverse pools of capital with long-term investment opportunities. Their development and adoption will be closely watched by investors, fund managers, and policymakers alike, potentially reshaping how capital is allocated to long-term, illiquid assets across the UK and EU.