New long-term funds set to democratise private credit
New fund structures in the UK and the continent are set to broaden access to private credit to professional and retail investors.
The UK’s Long Term Asset Fund (LTAF) and the EU’s second iteration of the European Long Term Investment Fund (ELTIF) are designed to encourage private investors to put money into long-term, illiquid assets, including credit. These structures could finally succeed in attracting wealth managers and financial advisers to private credit, an area where peer-to-peer lenders have struggled to gain traction and bring the asset class to a wider pool of retail investors.
One large manager already taking advantage of this is M&G Investments, which unveiled its first ELTIF fund last month focused on private credit, with £500m committed ahead of the launch. The M&G Corporate Credit Opportunities ELTIF is currently open to professional investors, with plans to open it up to the retail market early next year when the new ELTIF regulations come into force.
“This is M&G’s first ever ELTIF, which is really exciting to be involved in for several reasons,” said Michael George, who is managing the new fund.
“Firstly, it is opening up this asset class for the first time to a wholesale investor base. We’ve set a £25,000 minimum investment threshold.
“The second reason is the high yield that’s currently on offer, of around 10 per cent, combined with low volatility. And given that it’s floating rate, it’s not impacted by duration.
“Thirdly, we’re able to offer some liquidity, in contrast to private credit funds where your investments are usually locked up. We’re mixing broadly syndicated loans in with direct lending in a 70/30 allocation split between liquid and illiquid private credit.”
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The LTAF and the second version of the ELTIF are different regulatory structures with a similar aim of opening up private, illiquid assets to a wider investor demographic.
The LTAF was introduced by the Financial Conduct Authority (FCA) in 2021. It was recategorized from a Non-Mass Market Investment (NMMI) to a Restricted Mass Market Investment (RMMI) earlier this year, meaning that mass market retail investors, self-select defined contribution pension schemes and self-invested personal pensions (SIPPs) are able to invest into an LTAF.
“Longer-term less liquid real assets can generate good alternative returns for investors and, crucially, help to grow the UK economy through investments, such as new infrastructure,” said Sarah Pritchard, executive director – markets at the FCA, when the new LTAF rules were unveiled in June.
“Our new rules allow retail investors, and pension funds, to invest in productive finance, but they also recognise that long-term investments can be riskier. That is why people will be given clear risk warnings and customer assessments, in line with other higher risk products.”
In the EU, the second iteration of the ELTIF comes into effect on 10 January 2024. The original ELTIF structure was first introduced in December 2015, but was not very popular, with industry commentators criticising its lack of flexibility and limited range of eligible investments.
“The LTAF and the new ELTIF are coming from the same place in terms of encouraging an increase in private investment into illiquid assets such as credit or real assets,” said David Williams, partner and head of the investment funds team at Simmons & Simmons. “They are different, cross-channel sides of the same coin, notwithstanding the differences in the detail.”
Rather than competing, the two fund structures can be used in parallel as they have different benefits.
“If you’re a big investment manager you’d look at using them together,” said Williams.
“The ELTIF is a really good pan-European distribution regime, whereas the LTAF is a UK domestic product, designed to appeal to the defined contribution (DC) pension scheme investing community.
“The ELTIF won’t unlock DC investment money whereas the LTAF will.
“You can have an ELTIF with a private credit strategy and have an LTAF feed into it to aggregate UK capital from investors who need an LTAF product for regulatory reasons.
“On a macro level, ELTIFs and LTAFs are a set of tools that you can combine to give big managers a really powerful distribution solution.”
Access to LTAFs is set to be widened even further. The Treasury is opening the Innovative Finance ISA (IFISA) to LTAFs from April 2024, as part of a shakeup of the ISA market confirmed in last month’s Autumn Statement. LTAFs could not be held in an ISA until now because ISA assets needed to have the ability to be sold within 30 days.
Read more: The new IFISA rules explained
“The world’s most sophisticated investors, from endowment funds to sovereign wealth funds and family offices have long understood the benefits of investing in private markets as part of a diversified portfolio,” said Jonathan Moyes, head of investment research at Wealth Club.
“The decision to allow LTAFs within an ISA provides investors with the potential to gain exposure to this growth, in a tax efficient manner. “The inclusion of LTAFs should see the [IFISA] become a more compelling option for wealthy investors.”