The LTAF: The UK's Long-Term Asset Fund Explained

The LTAF operates within the FCA's existing fund regulatory architecture, specifically the COLL sourcebook (Collective Investment Schemes sourcebook). This positioning is deliberate — it allows the LTAF to benefit from established regulatory infrastructure while incorporating bespoke rules for illiquid assets.

FCA Authorisation

Each LTAF requires individual authorisation from the FCA. The authorisation process assesses:

• The suitability of the proposed investment strategy for the LTAF structure.
• The adequacy of the fund's liquidity management framework.
• The competence and resources of the Authorised Fund Manager (AFM).
• The robustness of the fund's valuation and risk management processes.

Authorised Fund Manager (AFM) Requirements

The AFM — the entity responsible for managing the LTAF — must meet enhanced requirements compared to managers of standard authorised funds:

• Expertise in illiquid assets: The AFM must demonstrate relevant experience in managing the specific types of illiquid assets the LTAF will hold.
• Dedicated resources: Sufficient personnel, systems, and risk management infrastructure to handle the complexity of illiquid asset portfolios.
• Stress testing: The AFM must regularly stress-test the fund's liquidity under adverse scenarios.
• Conflicts management: Enhanced conflict of interest policies, particularly regarding valuation of illiquid assets where the manager may have information advantages.

Depositary Obligations

LTAFs must appoint an independent depositary, consistent with other authorised funds. The depositary has enhanced responsibilities for:

• Oversight of the AFM's valuation of illiquid assets.
• Monitoring compliance with the fund's investment policy and COLL requirements.
• Safeguarding of assets, with particular attention to the custody of non-standard asset types.

COLL Sourcebook Rules

The LTAF-specific rules sit in COLL 15 (Long-Term Asset Funds), which covers:

• Investment powers and restrictions (including the 50% illiquid minimum).
• Dealing and valuation requirements.
• Disclosure obligations, including a requirement for clear communication of liquidity risks.
• Distribution rules and investor eligibility.

The LTAF's investment powers are deliberately broad, reflecting the diversity of long-term, illiquid asset classes.

The 50% Rule

The FCA expects the investment strategy of an LTAF to allocate at least 50% of the scheme property to unlisted securities and other long-term assets. This is a defining characteristic — it ensures the LTAF is genuinely oriented towards illiquid investments rather than being a standard fund with a small alternatives allocation.

Eligible Asset Categories

LTAFs can invest in the following asset types, either directly or indirectly (through fund-of-fund structures, SPVs, or other vehicles):

• Private equity: Buyouts, growth capital, secondaries, and co-investments in unlisted companies.
• Venture capital: Early-stage and growth-stage investments in innovative businesses.
• Private credit: Direct lending, mezzanine debt, distressed debt, and other non-bank lending strategies.
• Real estate: Direct property, development projects, and real estate debt.
• Infrastructure: Core infrastructure (utilities, transport), renewable energy, digital infrastructure, and social infrastructure.
• Forestry: Timber and sustainable forestry investments.
• Precious metals: Physical gold, silver, and other precious metal holdings.

Prudent Spread of Risk

The FCA requires LTAFs to maintain a prudent spread of risk — a principle-based diversification requirement rather than prescriptive concentration limits. This gives managers flexibility in portfolio construction while ensuring that the fund is not excessively concentrated in a single asset, sector, or geography.

The AFM must document its approach to diversification in the fund's prospectus and demonstrate to the FCA that its investment strategy provides adequate risk diversification.

Valuation Challenges

Illiquid assets present inherent valuation challenges:

• There are no daily market prices for most LTAF-eligible assets.
• Valuations typically rely on independent appraisals, discounted cash flow models, or comparable transaction analysis.
• The frequency of formal valuations may be quarterly or less, creating potential gaps between reported and "true" net asset value.
• The AFM must establish a robust valuation framework and engage independent valuers where appropriate.

Liquidity management is the central design challenge for any fund investing in illiquid assets. The LTAF framework addresses this through a combination of dealing restrictions, notice periods, and anti-dilution tools.

Dealing Frequency

LTAFs must deal at a minimum frequency defined by their target investor base:

• Professional investors only: At least monthly dealing.
• Retail-accessible LTAFs: At least quarterly dealing, with a minimum 90-day notice period for redemptions.

This contrasts sharply with standard OEICs, which typically deal daily. The reduced dealing frequency gives the AFM time to manage liquidity needs without resorting to forced asset sales.

Notice Periods

The 90-day minimum notice period for retail-accessible LTAFs is a critical investor protection mechanism. It serves two purposes:

• Giving the AFM time to arrange asset disposals or identify incoming subscriptions to fund redemptions.
• Discouraging short-term, reactive trading behaviour that could destabilise the fund.

Professional-only LTAFs may operate with shorter notice periods, though most set notice periods of at least 30 days.

Anti-Dilution Tools

LTAFs have access to several mechanisms to protect remaining investors from the costs associated with redemptions:

• Swing pricing: Adjusting the fund's net asset value up or down to reflect the transaction costs that would be incurred if assets needed to be sold (or purchased) to meet redemptions (or subscriptions). This ensures that dealing costs are borne by the transacting investors rather than the fund as a whole.
• Redemption gates: Limiting the total percentage of the fund that can be redeemed in any dealing period (e.g., no more than 5% of fund assets per quarter). When a gate is triggered, redemption requests are fulfilled on a pro-rata basis.
• Redemption deferrals: In exceptional circumstances, the AFM may defer redemptions entirely, though this requires FCA notification and is subject to strict conditions.
• In-kind redemptions: For large professional investors, redemptions may be settled by transferring underlying assets rather than cash.

Liquidity Buffer

The remaining 50% of the fund that is not required to be in illiquid assets provides a natural liquidity buffer. This portion can be invested in listed securities, money market instruments, or cash — all of which can be readily liquidated to meet redemption requests.

The FCA has progressively widened the distribution channels through which LTAFs can reach investors, reflecting a deliberate policy to channel more capital into productive, long-term assets.

Advised Channels

LTAFs can be distributed through FCA-regulated financial advisers who have assessed the investor's suitability. This is the primary retail distribution channel and requires:

• A full suitability assessment covering the investor's knowledge, experience, financial situation, and investment objectives.
• Clear disclosure of the LTAF's liquidity characteristics, including notice periods and redemption restrictions.
• Ongoing suitability monitoring where the adviser provides ongoing services.

Non-Advised Channels

The FCA has also permitted LTAF distribution through non-advised channels, subject to appropriateness assessments. This means LTAFs can potentially be made available through investment platforms that do not provide personal advice — significantly broadening the potential investor base.

However, platform readiness remains a work in progress. Many major UK platforms have not yet updated their systems to accommodate the unique dealing characteristics of LTAFs (notice periods, limited dealing days, etc.).

DC Pension Scheme Access

One of the most significant distribution developments is the opening of LTAFs to defined contribution (DC) pension schemes. The UK's DC pension market, estimated at over £600 billion, represents an enormous potential source of long-term capital.

Key aspects of DC access include:

• LTAFs can be included as part of a DC scheme's default investment strategy, subject to trustee governance and scheme-level suitability assessment.
• The long time horizon of pension savings (decades, in many cases) is well-matched to the illiquidity characteristics of LTAF assets.
• DC schemes may allocate a portion of their default funds to LTAFs without requiring individual member consent, though clear communication is expected.

Suitability Requirements

Regardless of the distribution channel, the FCA requires that:

• Investors understand the illiquid nature of the underlying assets.
• The investment is consistent with the investor's financial situation and time horizon.
• Clear, prominent risk warnings are provided, including the possibility that redemption requests may be delayed or gated.

The LTAF market is in its early stages, but momentum is building. Several prominent asset managers have launched or announced LTAF products, and the pipeline suggests significant growth ahead.

Current LTAF Launches

Early LTAF launches have focused on asset classes with established institutional track records:

• Schroders Capital Semi-Liquid: A multi-asset private markets LTAF providing diversified exposure across private equity, infrastructure, and real estate.
• abrdn Long-Term Asset Fund: Focused on UK and European infrastructure and real estate, targeting stable income and inflation protection.
• Fidelity Private Markets: Providing access to private equity co-investments and direct lending strategies through the LTAF wrapper.

Pipeline and Trends

The anticipated pipeline includes:

• Private credit LTAFs — particularly appealing given the current higher interest rate environment and demand for income-generating strategies.
• Infrastructure-focused LTAFs targeting renewable energy and digital infrastructure.
• Multi-manager LTAFs providing diversified private markets exposure through fund-of-fund structures.

Comparison to Existing UK Structures

The LTAF is not the first UK vehicle for alternative asset exposure. It exists alongside several established structures:

Structure	Key Characteristics	LTAF Difference
Investment trusts	Listed, closed-ended; shares trade at premium/discount to NAV	LTAF is open-ended; redeems at NAV (with notice period)
VCTs	Tax-advantaged VC vehicle; 30% income tax relief on subscription	LTAF has no specific tax advantages; broader eligible assets
EIS/SEIS	Direct company investment; significant tax reliefs	LTAF is a pooled fund structure; diversified exposure
Standard OEICs	Daily dealing; limited illiquid asset exposure	LTAF can hold 50%+ illiquid assets; quarterly dealing

The LTAF's primary advantage over investment trusts is the absence of discount/premium volatility. Unlike investment trust shares, which can trade at significant discounts to their net asset value during market stress, LTAF investors redeem at NAV (subject to anti-dilution adjustments). The trade-off is reduced liquidity — investment trust shares can be sold on any trading day, while LTAF redemptions require 90 days' notice.

While the LTAF provides a regulated framework for accessing alternatives, it does not eliminate the risks inherent in illiquid investments. Investors should carefully consider the following:

Liquidity Risk

The most fundamental risk. Even with notice periods and anti-dilution tools, there may be circumstances in which an LTAF cannot meet redemption requests in full or on time. Severe market dislocation, concentrated redemption demands, or difficulties in selling underlying assets could all trigger redemption gates or deferrals. Investors must genuinely be able to commit capital for the long term.

Valuation Uncertainty

Unlike listed securities with continuous market pricing, illiquid assets are valued infrequently and based on estimates. This means:

• The reported NAV may not reflect the price at which assets could actually be sold.
• Valuations may be "smoothed" compared to the volatility of public markets, potentially understating true risk.
• There is an inherent information asymmetry between the fund manager and investors regarding asset quality.

Fee Layering

LTAF fees can be significant, particularly for fund-of-fund structures where investors may bear fees at both the LTAF level and the underlying fund level. The total cost of investing in an LTAF — including management fees, performance fees, transaction costs, and administrative charges — should be carefully assessed relative to the expected net return.

Currency Risk

LTAFs investing in international assets expose investors to currency risk. A UK-domiciled LTAF investing in US private equity, for example, will see returns affected by movements in the GBP/USD exchange rate. Some LTAFs hedge currency exposure; others do not. Investors should understand the fund's currency policy.

Regulatory Evolution

The LTAF framework is relatively new, and the regulatory environment will continue to evolve. Changes to FCA rules — regarding distribution, liquidity management, or eligible assets — could affect the characteristics of existing LTAFs. The FCA has indicated it will monitor the market closely and may adjust rules based on how the framework develops in practice.

Manager Risk

Given the complexity and opacity of illiquid asset management, manager selection is arguably more important for LTAFs than for standard funds. The quality of the manager's deal sourcing, due diligence, portfolio construction, and exit execution will have a significant impact on long-term returns. A track record in the relevant asset class, demonstrated across market cycles, is an essential criterion.

The LTAF represents a welcome addition to the UK fund landscape — providing a regulated, transparent, and accessible route to alternative asset classes. But accessibility should not be confused with simplicity. These are complex instruments investing in complex assets, and they demand careful evaluation, appropriate time horizons, and a clear understanding of the trade-offs involved.