Long-Term Asset Funds are increasingly popular. The regulator’s website says there are four, plus six sub-funds, available for investment. Our recent Atlas 2024 report suggests the number will rise comfortably above 50.

In our latest webinar, three industry experts drill down into what matters when bringing an LTAF to the approval process and ultimately to market: Jeremy Soutter, Managing Director at Carne; Lora Froud, a Partner in the Investment Management Group at Macfarlanes; and Katie Bowmar, Global Head of Product, Investments, at WTW. Carne’s Ben van den Tol was the moderator.

Long-Term Asset Funds, or LTAFs, are fast becoming an essential structure. They enable investors to invest more easily into less liquid assets – such as defined contribution pension schemes allocating to private credit.

It’s no surprise that Jeremy Soutter estimates there are already about 50 LTAFs in the market.

Our panel suggests that asset managers interested in the potential of LTAFs should consider five key success factors.

 

1. The client

Katie Bowmar advises managers to take time in understanding how to take their investment proposition to the semi liquid space.

Within this, managers must develop a detailed appreciation of how their target market currently operates – and how they may need to adjust for an LTAF proposition. This should include their approach to dealing cycles and liquidity terms.

WTW’s own LTAF has a cornerstone investor in LifeSight, a defined contribution, master trust pension scheme. And the journey towards LTAF approval required WTW to fully comprehend the needs and mechanics of the platform to shape the product.

 

“Understand how your target market currently operates and how they may need to adjust for an LTAF proposition”

Katie Bowmar, WTW

 

2. Term sheets

“Then, get the term sheet together,” says Lora Froud.

This is a preliminary statement of the basic terms and conditions of an investment – to be followed by more detailed, legally-binding documentation. This requires an understanding of the desired target audience – and their specific needs – alongside the properties of the asset class in question.

 

3. Service providers

The next stage should be to select service providers. Managers without an internal AIFM must select a supplier with the right permissions to operate regulated AIFs.

The Financial Conduct Authority will see the proposal as the AIFM’s product. This means any AIFM, such as Carne, which has extensive experience acting as Authorised Corporate Director, or ACD, must lead on initial engagement with the FCA.

 

“As ACD, we’ll handle all the delegates, including sponsor, investment manager, distributor, fund administrator, and the AOV. We’ll also undertake the Consumer Duty role.”

Jeremy Soutter, Carne

 

Once a manager has selected an AIFM, they must appoint a depositary and administrator.

 

4. The pre-application discussion

This is where the FCA can kick the tyres, as Froud puts it. Alongside the term sheet, managers need a slide deck that tells the story of why they are launching the LTAF, and who it is aimed at.

Ben van den Tol at Carne points out that this brings benefits to the investment manager. With the ACD as AIFM on the product, and leading the discussion, the manager gets to focus on what they do best: investing.

 

5. The application itself

The application proper requires a prospectus constitutional document. ACDs and managers should consider the model portfolio carefully: what will it look like on day one? And how might it perform in stressed conditions?

Overall, the FCA is looking for five things.

First, the ACD must demonstrate appropriate levels of skill, experience and resource to supervise and oversee an LTAF. And, while the regulator may green light, say, a private credit fund, the process starts again if the same manager (with the same ACD) wishes to launch, say, a forestry fund.

Then, the ACD will be assessed on the distribution model and distribution chain. The FCA team will focus on who is at end of chain and how the manager provides them with appropriate information.

 

“Get organised early on. The FCA doesn’t like changes through the application process.”

Lora Froud, Macfarlane

 

Third and fourth, regulators will make a detailed appraisal of the manager’s (and ACD’s) liquidity management and valuation process. The former will require a significant level of detail – as Bowmar recalls: “Stress testing [liquidity on our own LTAF] was really important and we spent a lot of time on this, even into the Armageddon scenario.”

And it’s the same on valuation. Soutter points out that early conversations with platforms – who are used to a world heading towards T1, when LTAFs offer up to T35 – and also fund administrators will pay dividends later on.

Fifth, the FCA will want a clear picture of the flow of information between all parties – especially between manager and ACD – and how that information translates into outcomes.

Overall, thorough and appropriate preparation – especially in collaboration with an experienced partner – can ensure a smooth path towards approval. The FCA advises firms to allow six months but it is possible to navigate the path in two to three months.

And, according to the panel, the understanding is that the FCA is yet to turn down an LTAF application.

Full webinar recording available here.

For more information about Carne’s LTAF capabilities, please contact Ben or Jeremy:

Ben van den Tol
Director
ben.vandentol@carnegroup.com

Jeremy Soutter
CEO UK ACD
jeremy.soutter@carnegroup.com