What is the outlook for greater investment in illiquid assets?

Andrew Putwain: Long-Term Asset Funds (LTAFs) seem to be the latest buzzword; what are your thoughts on their pros and cons?

Mike Chappell: LTAFs offer a regulated and standardised approach for investing unit-linked funds into illiquid assets.

It should be noted that illiquid or semi-liquid assets are not new to unitised funds; the industry has invested in property (mostly commercial) for decades either in direct portfolios or through Real Estate Investment Trusts (REIT) and Property Authorised Investment Funds (PAIFs). 

"LTAFs offer a mechanism to have a more

diversified exposure to illiquid assets."

LTAFs offer a mechanism to have a more diversified exposure to illiquid assets, which has the potential to improve long-term savings outcomes for our policyholders.

Andrew: Looking at these differing mechanisms and frameworks – CDCs, LTAFs, and pension consolidators – where are the opportunities for greater investment in illiquid assets? Which areas are particularly attractive now and will be in the coming years? 

Mike: The ability to diversify away from property in unit-linked has great potential benefits. Assets such as Infrastructure, Private Equity (PE), Private Credit, Commercial real estate loans (CREL) and Venture Capital (VC) can all have a role to play. It is exciting to be able to deploy our policyholders’ pensions into assets that could deliver outsized returns whilst also helping to fuel growth in our economy and retain new companies in the UK. 

It should be noted that LTAFs holding these types of assets would predominantly be used inside large multi-asset managed funds where the provider controls the level of allocation through a Strategic Asset Allocation (SAA).

This is key to managing the obvious liquidity constraints that come with these asset classes.

Andrew: What are the specific operational considerations or hurdles you’re thinking about, especially those that might not be obvious at first?

Mike: Many of these assets will be accessed in a Fund of Fund (FoF) style in order to both diversify and achieve scale. 

"We feel that focusing on net returns to policyholders is what drives

better retirement outcomes."

These funds particularly in the PE or VC space will have performance fees. This is a key challenge for providers of daily priced unit-linked funds when considering fairness across different cohorts of policyholders. It is not insurmountable but complex and new. 

However, we feel that focusing on net returns to policyholders is what drives better retirement outcomes.

Mike Chappell will be speaking at Private Markets Investor in London on March 21, 2024. You can find more information on the event, including how to register to attend, here.