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Beginner's Guide to LTAFs: The New Way to Access Illiquid Markets
Long-Term Asset Funds (LTAFs) are the new kid on the block. First introduced in 2023, they are a type of FCA-regulated investment fund, sitting alongside unit trusts and investment trusts. They are open-ended, but only allow periodic contributions and withdrawals. They have been designed to provide a broader set of investors with access to private assets, including private equity, specialist property and infrastructure, which have previously been difficult to access in an open-ended fund because of liquidity constraints.
The Basics of LTAFs
LTAFs provide access to private markets. Most investors are familiar with ‘public’ investments such as company shares, which trade on an exchange. These can change ownership by the minute. Private investments are not publicly traded and are less easily bought and sold.
Historically, the lack of liquidity has made it difficult to hold private assets in an open-ended fund. In an open-ended fund, the investment manager needs to sell holdings to meet redemptions and buy new investments if they have inflows. With illiquid assets, there can be a mismatch between the liquidity provided to investors and the ability to buy and sell the underlying assets.
The most notable example has been the commercial property sector. During periods of dislocation in the commercial property market, funds saw redemptions and couldn’t sell commercial buildings fast enough to meet them. The funds had to close to redemptions. Ultimately, many closed permanently.
To date, the alternative has been investment trusts. These had a closed ended structure, meaning there were no inflows or outflows. Therefore, they provided a better solution to managing illiquid assets. However, because the share price is determined by market demand, rather than by the value of the underlying assets, the shares can trade at a discount or premium. This has been a particular problem for private equity trusts, where discounts have been as wide as 30-40%.
LTAFs are designed to be a hybrid between the two structures. They offer limited liquidity to investors, which is aimed at matching that of the underlying asset. This may be six weeks, quarterly or whatever is deemed appropriate by the manager. The funds are open-ended, so the price investors receive will match that of the underlying assets.
How will they work?
LTAFs are open-ended, meaning that they can grow to accommodate new investor demand by issuing new shares, or cancelling shares to meet redemptions. The shares in the fund will reflect the value of the fund’s holdings.
Investors will be able to buy into, or sell out of, the fund, in the same way as a normal UCITS fund, but at longer intervals than for traditional open-ended funds. Investment managers may hold a portion of the LTAF’s assets in more liquid areas, such as conventional shares or bonds, to meet these redemptions, allowing them to leave the portfolio of private assets untouched. The type of assets will determine how often investors will be able to buy or sell the fund.
Why invest in these asset classes?
The main aim of the LTAF is to bring a broader range of investment opportunities to a wider range of investors. While the investment characteristics of private assets will vary, they may include diversification from equities and bonds, stronger performance, and a new income stream.
A recent survey by the UK Investment Association found that the top motivations for investing in private assets are to protect against inflation eroding the value of savings (76%), portfolio diversification (67%) and superior long-term growth compared to public markets (61%). In addition, a third of investors consider it important to invest directly in infrastructure projects (38%), in physical buildings or real estate (33%) and in young, unlisted businesses (35%) through a Stocks and Shares ISA.
Inclusion in ISAs
The UK government has confirmed that LTAFs will be eligible for inclusion in a stocks and shares ISA from 2026. Investment Association research showed there is plenty of appetite - 57% of UK investors would consider investing in illiquid assets through Long-Term Asset Funds. The appetite is particularly strong among younger investors.[1]
Expert verdicts
The LTAF structure has been welcomed by industry participants, saying it provides a new tool for investors. Evangelia Gkeka, senior analyst for fixed income strategies at Morningstar, said: “While the LTAF market remains relatively immature, currently offering over 20 strategies in the UK, its potential for diversification and access to higher returns makes it an attractive proposition for investors. We expect continued growth in this space.
“That said, it is paramount for investors to conduct thorough due diligence, particularly around redemption and liquidity terms, fee structures and valuation processes. Clear and realistic risk/return expectations, aligned with the underlying strategies of each LTAF, are important, while transparency and confidence in the experience and capabilities of the investment teams are also vital.
Alex Davies, CEO at Wealth Club, adds: “Many of the most compelling investment opportunities today lie outside listed markets, and this change allows retail investors to access these in a tax-efficient manner.
“However, despite the headline announcement, two significant barriers remain to be cleared before these funds become mainstream. Firstly, availability is limited. Few leading global managers have launched LTAFs, with many preferring to target SICAVs — the European equivalent — where the addressable market is bigger. Unfortunately, SICAVs are not eligible for ISAs, even though they are in essence exactly the same thing.
“Secondly, operational constraints among ISA providers pose a real challenge. Most major investment platforms are set up to accommodate daily-dealing funds, whereas LTAFs, by design, are long-term and relatively illiquid, typically offering monthly or quarterly liquidity. Updating infrastructure to support such funds is complex, time-consuming, and costly.”
Are they right for me?
Pros
Breadth of opportunities
Schroders cites UK government data, which shows there are approximately 35,900 medium sized businesses in the UK, but only around 1,900 companies listed on the London Stock Exchange. Companies are staying private for longer. This is creating more opportunities in private assets.
Higher returns
Areas such as private equity have seen higher returns over time. Investors are typically investing in companies at an earlier stage in their lifecycle, with a greater runway of growth ahead. Other private assets, such as infrastructure, may offer a high, inflation-adjusted dividend stream.
Portfolio diversification
Private assets may behave differently to public markets. They can bring in a new and diversifying source of return.
Cons
Can be more expensive
It is cheap and easy to trade a share listed on a stock exchange. It is far less easy to buy and sell a multi-million pound building, private company or infrastructure asset. Inevitably, these funds have higher trading costs.
Valuation is not clear
With exchange-traded products, the valuation of an asset is clear. However, for private assets, calculations are more complex. Valuations are set by independent valuers, with reference to the value of similar public market companies, recent transactions in the market, or typical revenue multiples for a specific type of business.
Tie up your money for longer
You will need to tie up your capital for longer periods of time. Also, to maintain liquidity, LTAFs will employ cash buffers. While these work well to provide liquidity, it means the money is not invested in line with the LTAF’s objectives – and not generating investment returns.
Key questions on LTAFs
Are LTAFs right for me?
LTAFs offer a breadth of investment options that may not be available through other investment structures. They may be right for you if you are looking for access to private market assets, such as private equity, infrastructure or property, helping to diversify your portfolio and harness new sources of return.
What’s the difference between an LTAF and an investment trust?
LTAFs are open-ended, meaning they trade at the value of the underlying assets, but only have occasional liquidity. Investment trusts are closed-ended, and trade on an exchange.
Why should I choose an LTAF over an investment trust?
An LTAF will trade at the value of the underlying assets, whereas an investment trust is exchange-traded and therefore may trade at a discount or premium.
Can I use LTAFs in an ISA?
Yes. The UK government has said that LTAFs will be eligible for inclusion in an ISA from April 2026.
How do I decide on the right LTAF?
The right LTAF will depend on your investment goals and existing investments. You will need to assess the type of risk profile offered by the underlying assets and the type of return you can expect.
Key takeaways
LTAFs offer a new way to access illiquid assets such as private equity, infrastructure or commercial property.
They offer periodic liquidity and will be eligible for inclusion in an ISA.
LTAFs are an interesting addition to the range of investment options available to retail investors. They provide a new way to access a range of alternative assets that can bring sources of return and diversification to a portfolio.
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[1] (#_ftnref1) https://www.theia.org/news/press-releases/nearly-3-5-uk-investors-would-consider-long-term-asset-funds-government
