FCA wants to lure DC schemes with new type of open-ended illiquid fund
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The Financial Conduct Authority has launched a consultation on its proposals for a new category of fund designed to invest in long-term, illiquid assets, as decreed by chancellor Rishi Sunak last November.
The FCA is proposing that these funds would be open-ended and able to invest in assets like venture capital, private equity, private debt, real estate and infrastructure, which the government now refers to as 'productive finance', having previously used the term 'patient capital'.
The regulator wants to amend the permitted links rule so this new type of fund could be used by defined contribution schemes. DC schemes would be able to consider the proportion of illiquid assets across their investment portfolios, rather than to restrict the proportion of illiquid assets in each underlying fund in which they invest.
The FCA is proposing that LTAF rules embed longer redemption periods, high levels of disclosure, and specific liquidity management and governance features, as current open-ended structures investing in illiquid assets can face problems if they offer daily dealing to investors.
These requirements "would take account of the types of risk to which LTAFs might be exposed and help give investors confidence that they are being managed appropriately and in their interests," the FCA said.
Nikhil Rathi, chief executive of the FCA,said it was important for economic growth that the financial system supports investment that may take time to deliver a return.
"This is in addition to the potential benefit to investors themselves. We think our proposals would enable the establishment of authorised funds that are appropriate for both professional investors and sophisticated retail investors that want this type of investment risk and opportunity," he said.
"This new type of fund may also be more attractive to DC pension schemes that have long investment horizons and who under current fund structures, find it difficult to invest in these types of assets," Rathi added.
The FCA has been working with the Treasury and the Bank of England as part of a Productive Finance Working Group, which is considering how the wider system can operationally support the LTAF as a non-daily dealing fund, potentially following up with similar funds.
The working group is expected to come up with conclusions in July.
