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FCA to create framework for new open-ended fund

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FCA to create framework for new open-ended fund
The Long-Term Asset Fund regime creates a new FCA regulated fund that is designed specifically to help investment in assets including venture capital, private equity, private debt, real estate and infrastructure. Photo: Chris Helgren/Reuters

The UK's Financial Conduct Authority (FCA) has on Monday announced it will create a new type of open-ended investment fund. 

The move will mean sophisticated investors and pensions funds will have access to new types of opportunities, with funds helping to support investment in assets like infrastructure and private equity.

Investment in these assets has the potential to generate better returns for investors, including those saving for retirement in defined contribution (DC) pension schemes. 

The FCA said it could also benefit the wider economy by supporting the economic recovery from COVID-19 and supporting financial stability.

The new rules create a Long-Term Asset Fund (LTAF) regime, a new FCA regulated fund that is designed specifically to help investment in assets including venture capital, private equity, private debt, real estate and infrastructure.

As investments in this type of fund may take longer to sell, the FCA has put in place rules to ensure there is a consistency between how long it will take to sell assets and how often and quickly an investor will be able to sell out of the fund.

Currently, some investors are unable, or unwilling, to invest in long-term assets, even though these assets could meet their investment goals.

"If this innovative fund structure, created by our rules, is taken up by the asset management industry, it may provide alternative routes to returns for investors, while supporting economic growth and the transition to a low carbon economy," said Nikhil Rathi, chief executive of the FCA.

Read more: Bitcoin continues to fly high on boost from launch of first-ever ETF

The LTAF is aimed at DC pension schemes which may be interested in investing, in line with their investment horizons and risk appetite. 

It also offers long-term investment opportunities to sophisticated investors and some high-net-worth individuals.

Analysts weren't overall convinced by the proposition. 

"What the FCA can’t and won’t do is limit the investment scope of such funds to the UK," said Laith Khalaf, head of investment analysis at AJ Bell.

"LTAFs will probably prove to be a bit of a damp squib for British business therefore, given that the prevailing investment appetite is predominantly for overseas assets, so the Chancellor should brace himself for disappointment over the scale of fresh pension capital that will be directed to building back better in the UK."

The FCA will be consulting next year on the potential for widening the distribution of the LTAF to certain retail investors. While this would potentially open a controlled route for retail investors to higher risk assets than some of the other routes currently available such as unauthorised funds, safeguards would also be needed to ensure retail investors understand the risks involved.

Next year’s consultation will set out proposals for how this could be achieved

Watch: Will interest rates stay low forever?

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