Private debt sector poised for influx of pension money

The private credit space could soon see a wave of investment from defined contribution (DC) pension schemes, thanks to Long-Term Asset Funds (LTAFs).

The LTAF is a Financial Conduct Authority (FCA)-approved structure which was opened up to professional and retail investors last year to encourage private investment into illiquid assets such as credit or real assets.

Read more: New long-term funds set to democratise private credit

“While bigger pension schemes were already moving to illiquid assets, the LTAF structure makes it easier,” said Joe Dabrowski, deputy director – policy at the Pensions and Lifetime Savings Association.

“It’s a package you can buy off the shelf. It creates more options, as it’s a wrapper approved by the FCA that can work with platforms.”

There are currently just six authorised LTAFs, according to the FCA’s financial services register, with many more firms in the application process.

Investment giants BlackRock, Aviva Investors and Schroders all offer authorised LTAFs. BlackRock has an LTAF with a 10 to 20 per cent allocation to private credit, while Alternative Credit Investor has spoken with one asset manager currently going through the authorisation process which plans to have a 20 per cent allocation if its LTAF is approved.

Dabrowski expects LTAFs to pick up in popularity as more funds come to the market in the next few months, which could have a knock-on impact on the alternative credit sector.

“I think schemes are willing to look at a range of options within LTAFs and a lot of them will look to have private credit in their portfolios,” he added.

Aviva Investors, which has launched a real estate-focused LTAF, is bullish about the structure’s growth.

“It’s hugely encouraging to have a fund structure regime that is supportive of more illiquid asset classes,” said Mark Meiklejon, head of real asset investment specialists at Aviva Investors.

“We’re definitely seeing a lot more client interest, including from DC master trusts.

“It definitely helps to have a quasi-regulated structure with appropriate liquidity to protect existing investors.”

Meiklejon said that Aviva “has pretty developed ambitions to launch another LTAF”, and is “definitely” considering private debt among other assets.

M&G Investments is also exploring the potential of the scheme.

The asset management firm unveiled its first European Long-Term Investment Fund (ELTIF) in November focused on private credit. The ELTIF structure is the EU’s equivalent to the LTAF.

“We’re also supportive of the LTAF proposition and this is an initiative we’re actively exploring, both for wholesale and DC audiences,” said Jo Waldron, head of client and solutions, private credit.

“Private credit can represent an attractive asset class for DC clients: With its floating rate nature, private credit is offering equity-risk-like returns (around nine to 10 per cent yields) without the duration-linked volatility you would find in traditional fixed income – this can be particularly useful in DC defaults as members are approaching retirement. The ability to offer this strategy and benefits in a vehicle compatible with life insurance platforms is a development we certainly welcome.”

Regulatory process

Alternative Credit Investor understands that the LTAF authorisation process takes six months, with the regulator taking an interest in the fund’s environmental, social and governance credentials and valuations.

While most private credit investment strategies should be possible within an LTAF, the FCA is understood to be keen to ensure that managers of LTAFs have the knowledge, skills and experience necessary to manage the assets their funds invest in.

“We expect there to be a lot of interest in LTAFs as it gives you something that doesn’t exist at the moment from a regulatory standpoint – access to pension schemes,” said David Williams, partner and head of the investment funds team at Simmons & Simmons.

“We’re not seeing much in the way of demand for LTAFs from the far retail end, more structuring for indirect retail such as DC pension funds. The magic thing for the LTAF is that it’s available much more readily for pension schemes, so it’s not retail even though the end user is.”

Ready for retail?

While the pensions industry is gearing up for LTAFs, retail investment platforms are yet to be convinced, despite the Treasury’s efforts to open up the structure to a wider array of investors.

LTAFs will be eligible to be held within the Innovative Finance ISA wrapper from April 2024, as part of a shake-up of the ISA market confirmed in last November’s Autumn Statement.

LTAFs could not be held in an ISA previously because ISA assets needed to have the ability to be sold within 30 days.

“We welcome the idea of offering diversification and long-term investment opportunities to portfolios through innovative structures which deliver good client outcomes,” said Emma Wall, head of investment research and analysis at Hargreaves Lansdown, the largest platform for private investors in the UK.

“We have reviewed LTAFs across the business, including input from the policy team, fund research and asset allocation. At this stage we do not feel the product is sufficiently mature or transparent for us to include in our solutions, but we are committed to analysing new funds as they come to market and will review our position in a year’s time.”

The LTAF was first introduced by the FCA in 2021. It was recategorized from a Non-Mass Market Investment (NMMI) to a Restricted Mass Market Investment (RMMI) in June 2023, 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.