LTAFs gain popularity among workplace pension schemes

After a slow start, Long-Term Asset Funds (LTAFs) are starting to gain traction. A variety of different approaches are being developed by pension schemes for various stages of the member’s investment journey.

To recap, these structures were launched by the FCA in October 2021 as way to give investors access to private markets but with a notice period of at least 90 days for redemptions. The aim was to make it easier to invest in illiquid assets.

Since then, we have seen a handful of launches by fund managers, usually in conjunction with a seed investor DC client. With these launches, and with awareness growing of the benefits of including alternative assets, recent months have seen an uptick in pension schemes exploring the use of these products.

Different approaches to product structure

As DC pension schemes are far from homogeneous, they have different investment beliefs, objectives and targets, resulting in different approaches to investing in alternatives.

Speed of adoption depends on the sophistication of the scheme’s governance, and the external commercial pressure felt by schemes to allocate to private markets.

LTAFs are not, however, the only option. The more sophisticated master trusts have already allocated to alternative assets through mandates with individual managers. And there are other structures which can be used such as the Luxembourg ‘Reserved Alternative Investment Fund’ (RAIF) and the UK’s ‘Funds of Alternative Investment Funds’ (FAIF).

The most common approach we hear being discussed today is where large DC asset owners establish an “open architecture” LTAF. They would then source investment services either from their in-house manager, or from external managers where there is no in-house specialist expertise.

Investment design

We see two common approaches to investment design for private markets starting to take shape.

The first is the creation of a multi-asset fund diversified across a broad range of private markets, such as private equity, private credit, real estate debt and natural capital. The aim being to provide some diversification and performance benefit when integrated within the main default fund at a fixed percentage, say 5% across the glidepath.

The second approach is to deploy a private markets vehicle for a specific purpose within the default glidepath. For example, private equity could be deployed within the growth phase and private credit within the consolidation phase, each offering characteristics appropriate to the likely length and risk/return requirements of that phase of the glidepath.

More sophisticated pension schemes are likely to look for best-in-class investment services for each of the asset classes to ensure the best possible management of private markets can be provided.

With schemes now more advanced in their investment design for private markets, we can expect to see a flurry of fund launches in this space over the next twelve months.