15 March 2023

Private Fund Managers and Retail Investment in the UK and EU: Comparing the UK’s Long Term Asset Fund

The UK Financial Conduct Authority (FCA) has just announced its first authorisation of a Long Term Asset Fund (LTAF). We have written about the FCA’s increased focus on continuing access by retail investors to wholesale or private funds, whilst ensuring that managers have proper regard for the vulnerability of those investors. This policy focus has arisen in part in the context of the new financial promotion rules, as covered in our previous alerts The Remaining New Financial Promotion Rules for UK Private Fund Managers: Less Than a Month Away and New Risk Warning Rules for UK Private Fund Managers: Action Required, and the consumer duty covered in both The UK Consumer Duty: Next Steps For Private Fund Managers and The UK Consumer Duty: The FCA’s Reminder for Private Fund Managers. In addition, development of the LTAF, in a similar vein to its EU counterpart, the European Long-Term Investment Fund (ELTIF), is an important further step towards the ‘retailisation’ of investments that would otherwise be available only to professional investors. The LTAF, like the ELTIF, offers managers of private funds a distinct and more tailored way of accessing retail investors.

Whereas the FCA rules on financial promotion focus on direct retail access to private funds, the LTAF provides a form of indirect access via an authorised open-ended fund vehicle. The use of a fund vehicle authorised by the FCA, in contrast to a private fund vehicle such as an unregulated limited partnership, which does not itself have to be FCA-authorised (although its manager typically does, as an alternative investment fund manager [AIFM]), is typical for retail investors.

In this briefing, we put the LTAF under the spotlight, including examining how its key features compare with European competitor vehicles — the ELTIF, Luxembourg Undertakings for Collective Investment (UCIs – Part II), and EU Undertakings for Collective Investments in Transferable Securities (UCITS). We also weigh the LTAF against other UK authorised vehicles on offer alongside the LTAF: a non-UCITS retail scheme (NURS) and a qualified investor scheme (QIS). The LTAF, QIS, and NURS are regulated by the FCA, must adhere to detailed FCA regulatory requirements, and follow the FCA principles for business.

Introducing the LTAF

Available since November 2021, the LTAF is an open-ended authorised fund structure that can invest in a full range of illiquid asset classes. With news of the first LTAF FCA authorisation on 9 March 2023 and several other firms reportedly having formally applied to launch one (and many more exploring a launch), LTAFs are now a reality. The uncompetitive six-month FCA authorisation timescale (which compares negatively with other UK authorised vehicles) may well be outweighed by the UK government’s focus on a broader distribution of the LTAF. Along with the revamped ELTIF (covered in ELTIF Reform: A Milestone in the Development of an EU Private Fund Structure for Accessing Wholesale Markets), we would expect the number of LTAF launches to increase as managers targeting retail investors become more convinced of its benefits.

Key features of the LTAF

  • At least 50% of the value of the scheme property is expected to be invested in long-term illiquid investments (i.e., unlisted securities, interests in immovables or indirect interests in such long-term assets via other collective investment schemes [CIS]). Investment by LTAFs is not strictly limited to assets commonly regarded as ‘productive finance’, and the rules do not attempt to define ‘productive finance’ or ‘illiquid assets’.
  • Only full-scope UK AIFMs can act as authorised fund managers (AFMs) of LTAFs, and they must demonstrate to the FCA that they possess the necessary expertise for the proposed investment strategies (whether or not they intend to delegate).
  • One of the main appeals is that LTAFs can be promoted to certified high-net-worth individuals, as well as sophisticated retail and professional investors and certain defined contribution (DC) pension schemes. This is set to be broadened — an August 2022 FCA consultation is proposing to extend the LTAF’s investor base to restricted retail investors (up to 10% of their investable assets, and subject to certain conditions being met). The proposals are aligned with the changes to the financial promotion rules for ‘high risk investments’. In addition, from Spring 2023 the government intends to exempt performance fees from an annual 0.75% cap on annual charges that can be levied on auto-enrolled pension savers, which will again broaden investment opportunities for DC pension schemes.
  • To cater to regulatory concerns around liquidity mismatch, the final rules introduced new specified minimum standards that require LTAFs to permit redemptions no more frequently than monthly, and to have at least a 90-day notice period on redemption.
  • The FCA rules on mandatory suspension of dealings where there is material uncertainty about the valuation of at least 20% of scheme property (that applied from September 2020 under the FCA Policy Statement PS19/24 on illiquid assets and open-ended funds) do not apply to LTAFs (or QIS). However, the AFM of the LTAF can, with the prior agreement of the depositary, and must without delay, if the depositary so requires, temporarily suspend dealings of units, where due to exceptional circumstances it is in the interest of all the unitholders.
  • Investment powers are similar to those of the QIS — certain specified investments, including immovable assets and commodities. LTAFs can also invest in loans (with some restrictions; e.g., an LTAF cannot make loans to natural persons or to the AFM, depositary, or their associates).
  • Various investment restrictions apply (mirrored on the QIS). For instance, the LTAF cannot invest more than 20% in QIS, other LTAFs or unregulated schemes unless the AFM has carried out due diligence and the CIS or other schemes comply with the relevant legal and regulatory requirements (on an ongoing basis). A principles-based requirement applies to the AFM to ensure that the scheme does not indirectly invest in itself (this is more flexible than the QIS restriction that no more than 15% of the fund value can be invested in underlying funds of unregulated CIS).
  • The prescribed Senior Managers and Certification Regime (SMCR) governance responsibilities (namely, assessment of overall value, requirement for independent directors on AFM boards, and acting in investors’ best interests) will apply to AFMs of LTAFs. In addition, an AFM must appoint an approved person to assess and report on the LTAF’s investment valuations, due diligence, conflicts of interest, and liquidity management. We will need to monitor any changes to these requirements given that the SMCR is subject to review.
  • In addition to the half yearly and annual reporting requirements for AFMs, an LTAF’s AFM must deliver quarterly updates to investors: to cover portfolio investments, including details of any transactions during the period (together with an explanation of how the transaction is consistent with the LTAF’s investment objectives, policy, and strategy) and any significant developments in the investments for which investors require reasonable notice.
  • An AFM need not appoint an external valuer if the depositary has determined that the AFM has the resources and procedures for carrying out asset valuation. An external valuer is also required for an LTAFs that invest in other CIS or AIFs.
  • The FCA notes that in some cases (i.e., real estate assets), it is not workable for the depositary to hold scheme property, and the authority intends to consult on changes (in line with the Alternative Investment Fund Managers Directive [AIFMD] ownership model. which has a carve-out for noncustodial assets, but with appropriate protection for retail investors). In the meantime, it will consider applications to modify or waive the LTAF custody requirements, but only if it is satisfied that any alternative custody mechanism provides sufficient protection for investors. Depositaries will not have a role in overseeing the value assessment.
  • LTAFs must publish monthly valuations, regardless of their dealing policy.
  • The AFM of the LTAF must ensure that the scheme property of the LTAF aims to provide a prudent spread of risk (a higher threshold than for the QIS spread of risk). There is no ramp-up period for this rule to apply.

The LTAF: Key features

Vehicle Overview Key points of interest Vehicle regulation

Long Term Asset Fund: an FCA- authorised open-ended fund vehicle

An LTAF is based on a QIS (see below) and can invest in a range of permitted investments, including real estate and loans.

The investment strategy of an LTAF must be to invest mainly in long-term illiquid assets.

The EU legislation on the ELTIF (see below) is to be repealed in the UK (as part of the Edinburgh Reforms package of provisions to address retained EU law), given the lack of take-up in the UK and the option of the UK-specific LTAF.

The borrowing limit of an LTAF is 30% of NAV.

Currently, LTAFs are intended only for professional clients and for retail clients who are sophisticated investors or certified high-net-worth individuals. In addition, DC pension schemes can invest in an LTAF through a unit-linked insurance wrapper or as a professional investor.

As set out above, the FCA is consulting on broadening pension scheme access and facilitating broader retail access. Expected regulatory changes should also make it easier for DC pension schemes to invest in funds featuring carried interest or performance fees.

Only full-scope UK AIFMs can act as AFMs of LTAFs, and they must demonstrate to the FCA that they possess the necessary expertise and skills for their proposed investment strategies (whether or not they intend to delegate).

An LTAF cannot offer redemptions more frequently than once a month and is subject to a mandatory notice period of at least 90 days for redemptions.

Comparing the LTAF with related EU vehicles

Vehicle Overview Key points of interest Vehicle regulation

European Long-Term Investment Fund: an EU-regulated closed-ended fund (with the option to be semi open-ended)

The ELTIF is a collective investment framework for both professional and retail investors looking to invest in long-term illiquid assets such as real estate and infrastructure projects.

A review of the ELTIF Regulation was finalised in October 2022, approved by the European Parliament on 15 February 2023 and adopted by the Council of the EU on 7 March 2023. The amending regulation will come into force 20 days following its publication in the Official Journal of the EU and apply 9 months later.

Under the amended Regulation, ELTIFs solely marketed to institutional investors can borrow up to 100% of the net asset value of the ELTIF (and up to 50% for ELTIFs marketed to retail investors).

Helpfully, the amending Regulation reduces barriers for retail investors (by removing the €10,000 initial investment requirement and 10% exposure threshold for retail investors with portfolios below €500,000) and aligns the suitability test with that of the Markets in Financial Instruments Directive II.

There is also clear differentiation between ELTIFs to be marketed exclusively to professional investors and those that are marketed to retail investors. For instance, provisions on diversification and concentration are disapplied for ELTIFs marketed only to professional investors. The ELTIF marketing passport extends to both retail and professional investors.

An ELTIF is subject to AIFMD.

The aim of the amendments is to make ELTIFs more appealing to investors, in particular retail investors; minimise restrictions and reduce barriers; and provide more flexibility and accessibility to the regime and more favourable redemption options.

Luxembourg Undertakings for Collective Investment (UCIs – Part II)

Part II UCIs are subject to the provisions of the second part of the Luxembourg 2010 law transposing the UCITS Directive.

A Part II UCI must invest capital based on the principle of risk spreading and the 2010 law and other Commission de Surveillance du Secteur Financier (CSSF) regulations provide for specific restrictions.

There are no restrictions with respect to eligible assets (unlike in the case of UCITS).

Borrowings of up to 25% of net assets are allowed without any restrictions.

A Part II UCI can be marketed to professional investors in the EEA under the AIFMD passport and can be offered to retail investors in Luxembourg. It should be noted, however, that a number of EU jurisdictions allow Part II UCIs to be marketed to their retail investors under applicable private placement regimes.

There are various safeguards in place when a Part II UCI is marketed to retail investors.

A Part II UCI is subject to AIFMD.

The risk diversification requirements are defined by IML Circular 91/75 and 02/80 — the requirements are less stringent than the ones applicable to UCITs. A Part II UCI can’t invest more than 20% of its net assets in securities issued by a single issuer.

Undertakings for Collective Investments in Transferable Securities (UCITS): an EU regulated open-ended fund

UCITS are subject to the provisions of the EU UCITS Directive.

A UCITS must invest capital collected from the public in transferable securities based on the principle of risk spreading.

A UCITS cannot invest in real estate or other physical assets.

The basic rule is that UCITS are not permitted to borrow, although member states can authorise limited borrowing.

UCITS can be marketed to all EU investors (including retail clients).

A UCITS has various investment restrictions, for instance on investment in property, investment limits, and risk spread and on redemptions, suspensions, and pricing.

There is a UK UCITS regime.

Subject to the regulation of the UCITS Directive (which includes conditions on the authorisation of the UCITS management company).

The UCITS regime is separate from that of AIFMD.

Comparing the LTAF with related UK vehicles

Vehicle Overview Key points of interest Vehicle regulation

Non-UCITS Retail Scheme (NURS): an FCA- authorised open-ended fund vehicle

Subject to some limitations, a NURS can invest in real estate and unregulated schemes.

The NURS appeals to those wanting to access the broad retail market. It comes with more regulatory compliance than for either the QIS or LTAF.

A NURS also has a borrowing limit of 10%.

NURS can be marketed toUK investors (including retail clients).

A NURS is subject to AIFMD.

A NURS has several investment restrictions, for instance on investment in property, investment limits, and risk spread, and on redemptions, suspensions, and pricing.

Qualified Investor Scheme (QIS): an FCA- authorised open-ended fund vehicle

A QIS can invest in a range of permitted investments, including real estate.

Institutional investors prefer the QIS (the less regulated alternative to the NURS). As stated above, the LTAF offers a broader investor base than the QIS. The borrowing limit of a QIS is 100%. However, the QIS is subject to various restrictions in its investment strategy and powers. QIS are intended only for professional clients and for retail clients who are sophisticated investors. FCA guidance states that the promotion of units in a QIS to a retail client who is not a certified sophisticated or a self-certified sophisticated investor is unlikely to be appropriate or in the client’s best interests. A QIS is subject to AIFMD.


The developments in the LTAF and the ELTIF in particular will, in our view, help shift the emphasis of discussions about private capital’s place in the retail investor market, away from costs alone and towards a more holistic consideration of the long-term returns and diversification benefits. There are various other investment structures that are used to accommodate wholesale clients investing in alternative assets. Examples include closed-ended listed investment companies, evergreen funds with fixed liquidity windows to align with the investment cycle of less liquid assets, and using aggregation feeders and dedicated funds to target high-net-worth investors. In addition, non-fund options include bespoke investment management arrangements. The details of these options are beyond the scope of this alert.

You may be interested in our other recent briefings for private fund managers: Horizon Scan for Private Investment Funds: Key Recent and Expected Funds, Regulatory and Tax Developments to Look Out For, and AIFMD II Gathers Momentum: The European Parliament Finalises Its Proposed Text

To discuss the contents of this alert, please contact the authors or your usual Goodwin contact.