Post-Brexit, the Financial Conduct Authority (FCA) introduced the Long-Term Asset Fund (LTAF), a UK-authorised open-ended fund structure which bears several similarities to the ELTIF. Unlike ELTIFs, which primarily target the private wealth space, LTAFs were initially designed to help defined contribution (DC) pension schemes access long-term, illiquid asset classes such as private equity and real estate: assets that were previously difficult for these schemes to access. There is currently £5bn of DC pension scheme money invested in LTAFs, but the market is approximately between £66bn and £132bn.

The FCA expanded the permissible investor base to include retail investors categorised as either high-net-worth individuals (HNWIs), sophisticated investors or “restricted investors”. Restricted investors are retail clients who commit to capping their exposure to “high-risk investments” (such as LTAFs) at 10% of their net assets. To protect retail investors, additional safeguards are required, including the provision of risk warnings, and documented appropriateness or suitability assessments to ensure the investor understands the risks associated with the LTAF.

While adoption within the private wealth sector remains in its early stages, the size of the market is roughly between £95bn to £190bn, numbers which have sparked significant interest among private capital managers seeking to develop products for private banks and wealth managers wishing to offer their clients a broader range of investments. This aligns closely with the focus of open-ended Part 2 UCIs (with or without the ELTIF label), which have historically been used in the private wealth space to provide HNWIs with exposure to alternative assets.

Following Brexit, fund managers can no longer rely on EU marketing passports under the Alternative Investment Fund Managers Directive (AIFMD) or ELTIF rules to market funds in the UK. As a result, Part 2 UCIs are currently promoted under UK national private placement rules, which limit marketing to professional investors, or retail investors categorised as sophisticated investors or HNWIs subject to (i) (for both types of investors) a knowledge test, and (ii) HNWIs meeting specific financial thresholds (at least GBP 100K annual income or GBP 250K investible net assets). Without an LTAF feeder, Part 2 UCIs cannot easily reach DC pension schemes and are confined to a relatively narrow subset of private wealth clients.

Expanding access to certain categories of retail investors and DC pension schemes presents a significant market opportunity for fund managers. LTAFs, when structured as feeder vehicles into Part 2 UCIs, provide a highly efficient mechanism for fund managers to access this growing pool of UK capital.

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