Advice firms are rejecting Long-Term Asset Funds, the new private markets structure for wealth investors, despite heavy pressure from the private markets sector to adopt them.
Of the five advice firms spoken to by FT Adviser, all of them rejected Long-Term Asset Funds, a semi-liquid fund structure providing UK retail access to private assets.
The firms cited concerns over liquidity, whether the funds offered the full benefit of investing in private markets, and lack of transparency over what they were investing in.
Platforms have also been reluctant to accommodate Ltafs as a new fund structure, because of technical concerns and whether there is a sufficient market to justify re-engineering their systems.
Kevin Kidney, head of investments at True Potential, said the firm was getting no client traffic from enquiries about Ltafs.
“We have been approached a couple of times [by providers] and the fee structure quoted to us was extraordinarily high and we felt it did not fit with the regulatory environment,” he said.
“It’s an asset class that we continue to research particularly within private credit, but we’re doing so with a healthy degree of caution, given that it’s an opaque asset class.”
A big concern is that the fund would be capitalised first before going out to fund investments, he said.
“It has the private equity type structure where you are capitalising a fund and at a certain level of critical mass the managers would invest that in a set of assets, which they believe would deliver the gross return desired. That’s a high degree of opaque product there.”
Ltafs in some ways are too complex for most retail investors but too standardised for genuine sophisticated private market investors
Victoria McGurran, director of private client relations of Maven, part of Mattioli Woods Group, was concerned about the challenges of valuing the assets, which are not marked to market, and therefore posed potential regulatory problems given that Ltafs are an RMMI product.
Under the Restricted Mass Market Investment rules, an RMMI product cannot make up more than 10 per cent of one’s portfolio, if one is unadvised, but private assets managers rely on judgement and formulae, rather than the instant valuations of publicly traded assets.
“If Ltafs can account for up to 10 per cent of an Isa portfolio, is it appropriate for that portion of the valuation to be based on illiquid, model-driven pricing rather than marked to market, given the accessible nature of the wrapper?”
Ltafs will be available in Isas from April. Some semi-liquid funds are attempting to move to daily pricing, although the assets remain the same.
Ltafs originally came from the defined contribution pension sector as a way for DC pension funds to invest in private markets in the UK, and were opened up to the wealth space by the FCA in the 2023.
Other semi-liquid structures are available, such as Eltifs, a European fund structure, or Sicavs, which are open to investors outside the UK and are marketed to high net worth investors.
McGurran is also of the view that it is a kind of halfway house for private markets, given that conventional private equity funds are closed ended funds. “It’s an open-ended vehicle trying to work like a closed ended fund.
“Our view is that illiquidity is a feature not a flaw. It’s treated as a structural problem that needs to be overcome but whichever way you dice it, it doesn’t undermine the fact that illiquidity is an integral part of private markets.
“Ltafs in some ways are too complex for most retail investors but too standardised for genuine sophisticated private market investors.”
She prefers to offer a more typical private equity type fund to her firm’s sophisticated investors.
Platforms
Meanwhile platforms are discussing how to integrate Ltafs, which offer redemptions no more frequently than monthly, with 90 day notice periods.
Both the Platform Association and the Investment Association are working together to try to fix the situation. Hargreaves Lansdown already offers two Schroders Ltafs on its platform.
Nick Fraser, chief product officer at Bravura, which powers many of the adviser platforms in the UK, said: “Bringing these assets on to UK retail platforms can present considerable technical difficulties. It is not simply a matter of adding a new asset class, it requires a fundamental rethink of platform architecture.
“Many providers are still operating complex legacy systems built for daily-dealt funds, which makes handling capital calls, irregular cashflows and non-daily pricing extremely challenging.
“There is a real risk that trying to meet these requirements results in time-consuming workarounds with systems which won’t cope with future demands without the need for substantial investment down-the-line.”
Charlie Julyan, Advice Solutions Manager, at Fidelius, said he preferred to use other structures.
“We do already see the use of some private markets, but through more accepted investment vehicles via VCT and EIS which of course come with the tax reliefs which help with the additional risk and illiquidity trade-offs. These products are only suitable for some investors.”
melanie.tringham@ft.com
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