Long-term asset funds have made great strides in a short space of time, opening up access to private assets for DC members. Jason Holland assesses the story so far and, with so much untapped potential, looks ahead to the next steps.
The advent of the long-term asset fund (LTAF) has “really opened up” the opportunity for Defined Contribution (DC) members to access private assets “in a way that just wasn’t there previously”, says Tim Horne, head of UK institutional defined contribution at Schroders.
LTAF is a new category of open-ended authorised fund designed to enable a broader range of investors, with longer-term horizons, to invest efficiently in long-term illiquid and private assets. The category was enabled when the Financial Conduct Authority (FCA) created a regulatory regime that came into force in 2021.
According to the FCA, the ability to invest in illiquid and private assets through “appropriately designed and managed” investment vehicles is important for supporting economic growth and in the transition to a low carbon economy.
Schroders launched the UK’s first LTAF in March 2023 – called Schroders Capital Climate+ – which was designed to help UK pension fund investors support the net zero transition. Other funds have been launched by the company since then.
For Horne, the LTAF structure has been a “game-changer” from a DC perspective because it is “extremely flexible”.
He tells the Private Markets Profile: “It allows practitioners to invest into private markets, whether that’s single asset class or multi asset class. It has no restrictions on the way you can invest, whether that’s through funds or direct deals, and it has a sensible approach to building liquidity into an open-ended fund structure without being overly prescriptive on what you have to do.”
Access to private assets is important, he says, because DC members are “the ultimate long-term investor” in the sense that they start investing when they join the workforce and can’t get their money out until the point of retirement, so by definition there is a long investment period.
Other asset management companies have made use of the LTAF structure, too. Jesal Mistry, head of DC investments at Legal & General, believes the advent of LTAFs is “a really significant moment for the DC market”. He states: “We’re seeing a cultural shift across the industry – historically, it has focused almost exclusively on low-cost, index fund-based solutions, whereas now, there’s a much greater focus on value for money and the role that private market allocations can play within that.
“By building products that can take advantage of economies of scale within DC, we’re able to give DC members access to the potential performance and diversification benefits of private markets that have traditionally been the preserve of other institutional investor types.”
For Legal & General, Mistry says that while the LTAF structure is an important component of its overall strategy for its recently-launched L&G Private Markets Access Fund, it is “by no means the full picture”.
“We have utilised an LTAF structure within our wider ‘Fund of Funds’ approach in order to allocate to a diverse range of illiquid asset classes, such as unlisted equities, private credit, clean energy infrastructure and real estate, both inside and outside the LTAF wrapper,” he says. “In our experience, we can manage the specific requirements of DC schemes within our overall structure, with the LTAF sitting alongside other funds which deliver important sources of liquidity to manage daily pricing and dealing.”
Lorna Blyth, managing director – investment proposition at Aegon UK, says the LTAF structure has been “helpful in giving comfort to trustees and DC default providers that they are operating within a regime which provides sufficient investor protection for workplace savers”.
In private equity, Blyth says the LTAF structure has allowed Aegon to access both direct and co-investments across the lifecycle of private equity. “Expanding the spectrum of companies we can invest in gives us a broader pool of assets to choose from,” she says. “The aim is to improve risk-adjusted returns, enhance diversification and provide access to innovative investment opportunities in areas that have historically been harder for workplace members to access.”
Scale is important, too, and Blyth says Aegon has “been able to work collaboratively with our asset managers to build bespoke LTAFs which allow us to control how and when the investments are made in the best interests of workplace members”.
The road ahead
The newness of the LTAF structure means some investors are still exercising caution, and it may be a while before the full potential of LTAFs is realised. “It will take time, and actually, that’s a good thing,” says Schroders’ Horne. That’s because “inappropriate investment decisions that then later have negative outcomes for DC members” might be avoided.
“We want to ensure that trustees and in-house investment teams are making the appropriate decisions to invest in the right asset classes at the right time. And that takes time,” he says.
“There’s an education piece: we’ve spent a lot of time over the last 18 months since we launched the first fund around education, on the fund structure, how it works, how the liquidity works, how the valuation processes work, all of those things.
“It’s the right questions for trustees to be asking us before they decide it’s right to lock in. Although these are semi liquid funds, they’re still long-term illiquid assets that need to be thought about in that sense. So caution is the right approach. But all the evidence we see is that demand is growing across the master trust space and now into the individual company spaces.”
Horne says it is Schroders job to work with the industry and fiduciaries to “make sure that they are comfortable making the decisions to invest into these types of asset classes which are different to the types of investments that people have had in their DC portfolios before”.
The key is building trust and confidence over a period of time, he says, “and you have to have a long-term view as it will take time, but I’m really confident there’s great investments to be had across the board”.
Legal & General’s Mistry agrees that “fiduciaries have been initially cautious as they represent individual savers who bear the risks of underperformance and high costs”. But as they gain more experience and confidence in this part of the market, “our expectation is that allocations will continue to grow”.
He adds: “The regulator’s recent consultation on value for money is also key to the growth of allocations in DC arrangements to private markets.”
Mistry notes that while the introduction of private markets into DC is in its “relative infancy as the industry and fiduciaries grapple with this relatively new aspect of investing for DC schemes”, the concept is not new for other institutional investors, such as DB schemes, which have benefited from these asset classes for some time. “Therefore, we fully expect that as the industry becomes more familiar and comfortable with this asset class, the demand for these types of investments will grow materially,” he offers.
So how big can the LTAF space become? Horne thinks that long term, individual company schemes “are looking at 15% of allocations in private assets” but “it will take time to get there”. Master trusts, because they have got a larger cash flow coming in, “potentially will push that a bit further”, to about 25% in private assets.
He comments: “That intention is a big number, but it will take time for that to come through. That isn’t one to two years, you’re not suddenly going to see tens of billions of pounds invested into private markets. But over a five-year period, there’s no reason why you can’t get to those sort of numbers across the industry.”
For Aegon, Blyth says the company’s initial aim is to introduce LTAFs into its largest default strategy, starting in Q4 2024. “Over time this exposure will increase to a target allocation of upwards of 15%. Alongside this we are exploring other strategies across the Aegon investment estate which would benefit from investment in private markets,” she adds.
A key factor is how any private market investment performs and impacts the overall solution. “Choosing the right manager and conducting robust due diligence takes time before the LTAF can be launched; there is a lot of work to be done prior to the first investment going in,” she notes.
However, Blyth believes that industry momentum suggests that “most flagship default offerings from providers will have some exposure to LTAFs over the next 5-10 years”.
When considering potential future innovations in LTAFs, Aegon’s Blyth thinks that as DC defaults grow in scale “it’s likely we will see a move from diversified multi alternative approaches to single strategy offerings focused in specific sectors or areas of the markets. We have seen the early adopters of LTAFs be managers focused on pooled solutions for multiple clients. As the market evolves we will start to see bespoke solutions for large investors.”
And while Legal & General’s Mistry says there will continue to be new launches in the market, “as ever with DC, the forces of consolidation will have a strong impact on the overall outlook”.
He says that building exposure to private markets “really benefits from economies of scale” – something that “only the biggest providers will be able to offer”.
Schroders’ current and future LTAFs
Schroders Capital Climate+, the first LTAF to be launched in the UK (in 2023), was designed to help UK pension fund investors support the net zero transition. “We think it aligns really well with the nature of long-term assets,” says Tim Horne, head of UK DC at Schroders. “Private capital has that ability to have a real impact, and therefore aligns well with climate transition needs. And the other aspect is, if you’re going to be putting new money to work you need to be able to deploy.
“If you look at where the deployment opportunities are, particularly around renewable energy, the amount of capital that needs to go in is very significant. So you’re playing into a market that actually wants to be able to take capital and deploy that. That was the genesis of the idea.”
The second fund launched by Schroders was Schroders Greencoat Global Renewables+, which the company describes as the UK’s first LTAF exclusively dedicated to renewable energy and energy transition infrastructure.
Horne says there are currently two funds going through the FCA process, with one targeted to the wealth market rather than DCs, “which we believe [also] shouldn’t be excluded from accessing private markets”.
Schroders has also partnered with Phoenix Group to launch Future Growth Capital, the first private market investment manager to be established in the UK to promote the objectives of the Mansion House Compact. The investment manager will design and manage UK and Global multi-private asset solutions for UK insurance and pension clients.
Horne says the first UK focused venture fund for the DC market is also being launched, with a £300m seed commitment already in place. “It is really exciting,” Horne says, “because that is an area where certainly DC interests have had no credible way of accessing the great growth stories that we see arising in the UK, within technology and life sciences.”
LTAFs and net zero
How can LTAFs be leveraged to help meet climate and net zero targets? Lorna Blyth, managing director – investment proposition at Aegon UK, says private markets investments can offer access to companies which directly contribute to climate change mitigation and/or adaption. Examples might be businesses that are developing new technologies to address climate change or that are providing essential services to underserved communities.
These investments can help to reduce or avoid emissions and support net zero targets set for DC defaults. The focus on sustainability is important, she says, because DC defaults are long term investments.
She says: “Investors can benefit from the growth opportunities which will arise as demand for industries associated with the net zero transition increases. Our use of direct investment increases the targeted intentionality of the investment and the control and influence of our chosen managers in terms of its environmental and social impact and the ability to measure those outcomes.”
L&G’s Private Markets Access Fund
Launched earlier this year, Legal & General’s L&G Private Markets Access Fund, which makes use of the LTAF structure, offers the company’s 5.2m DC members access to private markets. Jesal Mistry, head of DC investments, explains: “The fund aims to deliver exposure to the long-term growth potential of private markets while maintaining an appropriate liquidity profile to meet the daily requirements of DC savers.
“The fund offers a single point of access to a globally diversified portfolio of private market assets, with the ability to invest across L&G’s own private markets platform, complimented by leading third-party managers as well as those available through individual securities. These underlying strategies can provide exposure to investment themes such as clean energy, affordable homes, university spin-outs and critical infrastructure, which we believe can play a positive engagement role in getting DC members thinking about the positive impact that their pension could be having on the world around them.
“For us, success is about delivering that scale of exposure for our members. We’re aiming to grow the fund to £1-2bn by the end of 2025 and believe we can grow exponentially from there.”
