The vast majority of clients now will have portfolios made up of (mostly) listed assets - equities, bonds, ETFs - and structured in collective investment funds (OEICs and Unit Trusts for the most part). LTAFs broaden the asset scope hugely as private equity / venture capital, private credit, private infrastructure and real-estate all come into play given the usual rules on liquidity do not apply. Crucially, LTAFs will be available as collective investment funds (OEICs, Unit Trusts and Authorised Collective Schemes (ACS)) making them much easier to distribute and access.

As well as the strong long-term growth potential, the addition of long-term illiquid assets to a portfolio will provide huge benefits in terms of diversification. As current exposure to these assets for most retail funds is very low to non-existent, then the potential for asset overlap is also very low providing some additional potential protections from wider market movements. Another key difference between LTAFs and the current roster of long-term, illiquid portfolios (EIS, VCT, BR) in terms of diversification is that fund managers are able to look beyond the UK. As it stands, tax-advantaged portfolios are limited to early-stage UK-based companies, but LTAFs will be able to consider global assets in their portfolios.

LTAFs could also have a significant role in directing assets to early-stage companies that could play a pivotal role in shaping the future. Early-stage companies operating in areas like ‘green’ infrastructure (wind and solar farms, for example) and cutting-edge scientific research are again the types of companies that are largely out of scope of traditional collective investment funds given their lack of liquidity and relatively high investment risk.  

However, the illiquidity of these investments doesn’t play well with open-ended investments as we have seen previously with certain physical property funds. As commercial property is a slow process to purchase and sell (particularly for its true market value) fund managers can run into problems should investors require access to their money at short notice. When redemptions from the fund exceed any liquidity provisions, asset managers have to start selling the underlying assets. And in turn, when this cannot happen quickly (think about selling a house compared to selling some shares), funds have to ‘gate’ access to investors, preventing them accessing their own money as it remains tied up in a property. Nowadays we have Consumer Duty to consider, with one of the key aspects being the prevention of foreseeable harms. So what measures are in place to limit the chances of a repeat?

LTAFs will be marketed as restricted mass market investment (RMMI), meaning that they can be marketed towards certain retail investors (in line with additional rules and controls that must be followed), including additional risk warnings linked to the underlying assets held within the fund.

LTAFs will have a minimum 90-day notice period for redemptions too, meaning that investors (and advisers) will have to carefully consider this in their planning. Whilst this could present a headache for some clients, this should provide the fund managers with the necessary time to plan for any instances of heightened redemptions, avoiding a repeat of the issues that plagued physical property funds.

As these types of strategies are relatively labour-intensive for fund managers - initial and ongoing research and due diligence on underlying companies is particularly tricky when dealing with unlisted assets - then expect the ongoing costs to also be on the high side, particularly when they are considered alongside the low-cost passive strategies that are very favourable amongst the advice community at the moment. As more of these funds launch, their value will have to be considered as to whether the additional charges are justified under Consumer Duty.

At the moment (Feb 2025), only a handful of these funds have launched, with the longest track records only spanning a matter of months. Their availability is limited further with the funds in their current form only accessible to certain DC pension schemes and other institutional investors. This is likely to be by design at this stage as the FCA and providers are still metaphorically just dipping their toes into the water here, and will want to see how the first funds operate before widening access. It is still very early days and I expect to see interest in these strategies grow significantly in the coming months and years. Hopefully by then, we will have a lot more choice when it comes to providers and underlying strategies, as well as choices beyond holding LTAFs in just selected DC pension schemes.  

To wrap up, LTAFs are a new type of authorised collective investment that will facilitate access to private markets and assets by retail investors. The limited liquidity and high-risk nature of the strategies is likely to be problematic for a lot of investors but could be ideal for young investors with a very long time horizon and very high capacity for loss, and hence why they are currently being rolled out in selected DC pension schemes initially. In turn, the significant amount of new money reaching these early-stage companies has the potential to fund genuinely ground-breaking initiatives going forward. For financial advisers, LTAFs not only provide opportunities for strong long-term growth, but also open up a new range of assets that are an alternative to the traditional equity and bond portfolios to add greater diversity to clients’ strategies. In addition, with more and more clients expressing an interest in sustainable and impact investing, these funds could also prove to be hugely beneficial when catering to their preferences.

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