UK’s proposed long-term asset fund to lure more DC pensions into PE

The new open-ended fund structure seeks to address defined contribution schemes’ focus on costs at the expense of net returns, according to the Financial Conduct Authority.

The UK’s Financial Conduct Authority’s proposed easing of capital raising rules via a new, open-ended fund structure will give defined contribution pension plans in the country a piece of the private markets action.

The FCA began consultation this month on a new category of fund called the Long-Term Asset Fund, which will allow defined contribution pension plans and retail investors to “invest efficiently in long-term, illiquid assets”, according to a statement.

The LTAF will be an open-ended vehicle that is expected to include longer redemption periods, high levels of disclosure and specific liquidity management and governance features, the regulatory body said in the statement. UK investors currently invest in illiquid assets mainly through closed-ended structures, and some investors prefer investing in open-ended funds, the FCA noted.

“The FCA consultation on the long-term asset fund structure is a further welcome development in a general market theme of looking to widen the available investor universe for private equity – and other alternative assets – strategies,” Will Normand, a partner at law firm Travers Smith, told Private Equity International.

“The industry as a whole has been focused on a range of structures, both in the UK and continental Europe, that look to increase access for retail investors, and I would expect the LTAF to become part of that thinking going forward as the proposals are finalised,” he added.

The LTAF has the potential to be “one of the biggest shake-ups in years to the private equity industry as it relates to UK investors”, noted David Genn, chief executive of London-based investment platform Goji, which offers retail investors access to alternatives investments.

Genn added that with this move, private equity managers need to evaluate the options the LTAF gives them to structure innovative products that can capture the growing demand from private wealth for PE. “We’re currently having conversations with a number of GPs who are looking at how they can take advantage of the LTAF,” he said.

With the LTAF, the regulator intends to address DC schemes’ “focus on the costs of investing, potentially at the expense of net returns”, as well as an “investment culture that favours investment in daily dealing funds”, which have been inhibited investment in illiquid assets, according to the statement.

Two-thirds of DC schemes in the UK do not invest in illiquid assets, while the remaining one-third only invest between 1.5 percent and 7 percent, according to a survey commissioned by the Department for Work and Pensions. Governance, regulatory and operational challenges have prevented widespread uptake, although firms including Partners Group and Pantheon have been making moves in the DC arena.

Assets managed by UK DC schemes are forecast to grow to more than £1 trillion ($1.4 trillion; €1.2 trillion) in assets by 2030 as result of automatic enrolment, from £340 billion in assets in 2015, according to the FCA.

Normand, however, noted that while the consideration of the LTAF is welcome, it is not necessarily an answer to all of the issues associated with widening the types of investors coming into private equity.

According to Normand, increasing DC investments into alternatives is not just a question of appropriate fund structures, it is also about addressing the restrictions that are placed on the investments a DC scheme can make.

DC schemes are constrained by a 0.75 percent charge cap on assets under management and administration – an annual amount charged to savers that applies to all scheme administration and investment charges.

Private equity’s high fees have been a major concern for some DC pensions. In an interview with the Financial Times in April, Mark Fawcett, chief investment officer at the £16 billion Nest Pensions said the fund “won’t pay two and 20”. He added that the level of fees charged by most private market funds will remain “too high for many DC pension schemes to access”.

The UK government is consulting on whether to relax the annual charge cap and spread the investment fees over multiple years.

Along with the LTAF, the FCA also proposed lifting the 35 percent cap on illiquid investments that can be held in workplace pension funds.

The consultation runs until 25 June and the FCA plans to publish a final policy statement later in the year.