What PE managers need to know about launching an LTAF in the UK

Private equity managers now have yet another hybrid structure with which to attract pension funds and retail investors: the UK’s open-ended Long Term Asset Fund (LTAF).

According to panelists on SS&C’s webinar “LTAF Funds: Practical Considerations for Firms Looking to Establish an LTAF,” the new structure further blurs the line between the traditional private equity model of closed-ended limited partnerships and open-ended fund structures, and it’s getting more interest within the private equity industry.

Anil Kumar, a director at SS&C GlobeOp Private Markets, said the LTAF’s appeal for PE managers is the ability to grow their funds’ AUM by democratizing their investment strategy.

The LTAF is intended primarily for professional investors, defined contribution pension plans and sophisticated individual investors. As the LTAF is open-ended, investors are given regular redemption options.

LTAFs can be established as a unit trust, open-ended investment company or an authorized contractual scheme, Kumar said. The funds may also be structured as a feeder or master fund. No matter the structure, the LTAF must be an authorized fund that has the necessary investor protections.

LTAFs have a mandatory notice period of at least 90 days and cannot offer redemptions more frequently than monthly, which is in order to manage liquidity. However, Kamil noted that funds may require longer notice periods or less frequent liquidity.

“Managers may also introduce minimum holding periods, and it is actually expected that many LTAFs will have a notice period significantly longer than 90 days,” Kamil added. “Another feature is that managers can defer some of the redemption requests if they want to. With these terms, the LTAF will look quite different to existing authorized funds.”

There are also tax considerations when launching an LTAF, explained Hazell Hallam, a tax partner at PwC. Managers need to consider what sorts of investors are being targeted and what the investors are looking for.

From a tax perspective, managers can either have a tax-transparent type of fund solution – something akin to an authorized contractual scheme (ACS) – or have a more opaque option, like an offered unit trust.

Those targeting pensions will most likely opt for tax-transparent ACS vehicles, Hallam explained. “That’s because it would be tax transparent for income but not for gains. That would allow pensions to continue to access very favorable tax treaties and withholding tax rates that they have.”

That structure is also exempt from a tax on management fees.

Robin Callander, an associate director at Waystone, said the first step toward launching an LTAF is submitting an application to the UK’s Financial Conduct Authority. It is expected that the application process could take up to six months lead time and will include identifying service providers, an appointed depositary, custodian and auditor, much like other regulated funds in Europe.

“I expect that most strategies should be compatible with the LTAF,” Callander noted. “However, managers need to be sure to get the application right with regulators, in terms of the prospectus and defining the investment strategy and target audience.”

So, who would want to launch an LTAF? So far, “household name” institutional managers who have the capabilities to run liquid alternative funds have shown the most interest, Callander said. Smaller boutique managers are also looking at LTAFs to see if the structure can help them diversify their investor base, he added.