Investment in private credit has traditionally been the domain of closed-ended private funds. However, following its launch in November 2021, there has been discussion in the market about the UK Long Term Asset Fund (“LTAF”) as an access point to private credit strategies for UK investors who may not typically have direct access to such opportunities.
The LTAF has been developed as a new structure for professional and sophisticated investors, including Defined Contribution (DC) pension schemes, to allocate capital to less liquid long-term investments with the potential to offer superior returns due to the illiquidity premium.
To date, manager uptake of the LTAF has been slow, in part due to the length of the Financial Conduct Authority (“FCA”) approval process and also unfamiliarity in the market. Since March 2023, twelve LTAFs (including sub-funds) have been authorized by the FCA, some of which include a private credit component as part of a diversified strategy. However, the first LTAF with a dedicated private debt strategy has only just been launched, receiving FCA authorization in June 2024.
Establishing and investing in an LTAF requires a change in mindset from private fund managers and investors respectively in order to make it a viable option for private credit (or any other long term asset) investment.
As an open-ended fund, and given the illiquid nature of the underlying assets, liquidity management may seem a stumbling block to managers more familiar with closed-ended funds. However, apart from redemptions being no more frequent than monthly and subject to a minimum notice period of 90 days, managers can align the redemption frequency and notice periods with the liquidity of the underlying asset to meet redemption requests without compromising the fund's stability.
Target investors may be used to investing in vehicles with greater liquidity and may need to be satisfied that an LTAF investment can align with their investment strategy, risk tolerance, and regulatory requirements.
Unlike its European counterpart, the European Long-Term Investment Fund (“ELTIF”), the LTAF does not have access to the EU passport under the Alternative Investment Fund Managers Directive (“AIFMD”). However, it can invest in non-UK assets including non-UK funds and, subject to certain requirements, act as a feeder fund. An LTAF does not therefore need to be considered as a standalone fund, but could also provide an alternative access point for UK investors into a manager’s existing credit strategy (provided of course that the specific regulatory requirements and investment strategies of both the LTAF and the underlying fund align).
As the market becomes more familiar with the LTAF and the necessary operational framework continues to build, we should expect to see more LTAFs launching to access a wider base of investors and tap into the benefits of private credit as an asset class.
