On Thursday (29 June), the Financial Conduct Authority released a policy statement categorising the LTAF as a Restricted Mass Market Investment, which adds an additional layer of protections in the distribution process for LTAF products sold to retail investors.
"Hopefully the various layers of protection should reinforce investor confidence in the new vehicle, which in turn should make it a more viable product for managers to use to deliver their alternative strategies to a broader audience," said Lora Froud lead partner at law firm Macfarlanes.
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Schroders, which currently has two LTAFs for DC schemes in the market, is actively working on the launch of an LTAF product under the RMMI framework, with sights set on the first part of 2024, subject to regulatory approval.
Aviva Investors and BlackRock, which also have launched LTAFs for an institutional audience in recent months, declined to comment on plans to develop LTAF products for retail audiences.
Goldman Sachs Asset Management, which launched a European Long-Term Investment fund this year and has plans to develop a second, told Investment Week the firm is watching how the LTAF rules develop closely.
"The LTAF could be a vehicle that ultimately over time becomes quite meaningful in DC, but also in the wealth channels," said Hilary Lopez head of GSAM's Third Party Wealth business.
Additional layer of 'burden and care'
As institutional investors reach their long-term strategic asset allocation goals and face economic headwinds, the environment is becoming more difficult for private markets managers to raise capital.
In response, firms are starting to pivot fundraising efforts toward the private wealth channel, which is considered to be an $80trn marketplace, according to a report by the Capgemini Research Institute.
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Amin Ebrahim, investment funds counsel at Linklaters law firm, which advises private markets funds, said these firms have taken an interest in the LTAF due to the capital that could potentially be unlocked.
However, he said that additional layer of compliance burden and care that is needed under the RMMI regime may push asset managers "on the fence" away from engaging with the vehicle.
His colleague Rahul Manvatkar, partner at Linklaters, noted it will be easier for asset managers that are used to "playing" the regulated space to launch products that comply with the rules outlined by the FCA in the policy statement.
"This is a very different space for the managers who specialise in dealing with institutional investors," added Ebrahim.
However, they also argued that those managers involved in raising traditional open-ended retail products may not necessarily be "well set up" to deal with the liquidity restrictions that are in place for LTAFs.
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Olof Echt, managing associate at Linklaters, noted the flexibility of the what the LTAF regime can invest in was a helpful element of the revealed RMMI framework, with rules focused on disclosure and investor care rather than operational restrictions.
"The big private funds of this world have not traditionally set up retail-focused vehicles for now, they have been making a transition into this space," he said.
"For those who have been sitting on the fence, the big managers who have not really delved into the space, this is hopefully something they should be able to bolt on to their existing offering, rather than having to create entirely bespoke products."
Focus on intermediaries
At the same time as the FCA is in the process of broadening access to illiquid assets for retail investors, the regulator urged asset managers on Wednesday (6 July) to increase their focus on liquidity risks, warning that current liquidity management "could lead to a risk of investor harm".
Richard Stone, CEO of the Association of Investment Companies, said managers and distributors need to "carefully consider" how they approach any decision to offer these products to retail investors, and whether doing so meets their obligations under the Consumer Duty.
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Doug Abbott, head of UK intermediary at Schroders, said its retail LTAF will only be available for advised and wealth management clients initially, and would steer away from self-advised investors.
"The adviser has a big role to play while this is a new structure," he said. "People need to understand it operationally and need advice in order to get into. I do see it as more the high-net-worth, wealth and adviser end where we see the most demand to start with.
"We have a really healthy advisory and wealth management community in the UK, which should be well equipped to be able to pick the right structure and the right investment for the right customer."
Abbott noted that the investment trust market serves the individual investor market well for the time being, but argued the LTAF opportunity may also open up for this client segment.
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"This is a new area and, for private investors, I think that is a question that is yet to be answered. It depends on client education and good regulation," he said.
Linklaters' Manvatkar said the "big question" was whether the large private asset managers will think the mass retail market offers enough capital to make developing an LTAF for this client segment worth the effort, given the local nature of the structure.
"Managers may wish to focus on getting professional investor money or high-net-worth money or sophisticated investor money, but the RMMI concept goes one step further," he said. "It is taking not just from high-net-worths or sophisticated investors, but everybody up and down the street."
Platform demand
In the policy statement, the FCA noted there were concerns that investment platforms may encounter problems in accommodating LTAF distribution, as they may be reluctant to launch products with notice periods, as current market infrastructure is based on daily dealing.
"We recognise that there remain practical challenges for the LTAF; not least whether the platforms are willing and able to accommodate the LTAF's 90 day redemption notice periods," said Macfarlanes' Froud.
Some of the UK's largest investment platforms AJ Bell, Hargreaves Lansdown and interactive investor told Investment Week they were weighing up the challenges of providing their clients with these types of higher risk, illiquid products.
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For less liquid open-ended products to be available on platforms and be used at scale, Abbott said there is a "real need" to educate the industry on the operational complexity of these structures.
"There is an element of education for the industry on operational complexity that you do not have with daily trading unit trusts and shares, but I think with good education, and with some engagement with clients, these are not insurmountable issues," he said.
"In the UK, you have [platforms] that have the technology, the capability and the openness for different structures, you have some that do not. Overall, platforms go where the demand is over time, because people use platforms because they want access to things that they want to invest in for their clients.
"We think, over time, it is likely to open up."