LTAFs to Gain from ISA Integration: Proceed with Caution
The UK Long-Term Asset Fund (LTAF) market is growing, with over 20 strategies currently available and continued expansion on the horizon [1]. These funds, launched in 2021, offer retail investors broader access to illiquid private assets like private equity and infrastructure [2]. However, potential investors should approach LTAFs with caution, as they come with unique risks and considerations.
Liquidity
One of the most significant factors to consider is liquidity. LTAFs invest in long-term, illiquid assets, meaning that investors may face limited liquidity and potentially longer lock-up periods before capital can be redeemed [1][3]. The UK regulatory framework permits LTAFs to be included in Stocks & Shares ISAs from April 2026, broadening retail access, but also raising concerns about liquidity risks for less experienced investors [1][3].
Fees
Investors should also thoroughly understand the fee structures, which may include management fees, performance fees, and other charges typical of alternative long-term investments. Since LTAFs manage complex assets, fees can be higher than traditional funds, impacting net returns [2]. Due diligence on fees and cost-effectiveness is critical.
Valuation
Valuing underlying long-term and illiquid assets can be challenging due to the lack of frequent market prices. Investors should assess the fund manager's valuation policies and transparency in reporting to ensure fair asset pricing and avoid valuation risks [2].
Due Diligence
Rigorous due diligence on the asset manager’s expertise, track record, operational controls, and regulatory compliance is essential. Given the complexity and risks of private assets, investors must evaluate the manager’s ability to manage illiquidity, governance, and risk processes effectively [2][4].
Additional context: The UK government's reforms aim to broaden retail participation in LTAFs and long-term savings, but investor education about the risks of illiquidity and complexity remains important. Investors should align investments in LTAFs with their long-term objectives, risk tolerance, and financial planning strategies [1][3][5].
Setting Expectations
It's crucial to set clear and realistic risk/return expectations, aligned with the underlying strategies of each LTAF. Investors should not expect daily dealing or seamless exits, as LTAFs are designed to hold less liquid, longer-dated assets [6].
As the LTAF market matures, it is expected to attract more attention from US and UK asset managers [7]. Morningstar data shows that FCA-approved LTAFs currently manage around £5 billion, with an additional £3 billion of committed capital yet to be called [8]. The change in eligibility for LTAFs in ISAs could serve as a catalyst for progress in platform availability [9].
Evangelia Gkeka, senior analyst for fixed income strategies at data provider Morningstar, believes the change could drive assets under management growth in LTAFs via the retail channel [9]. LTAFs promise diversification and higher returns, making them an attractive proposition for retail investors from 2026 [8]. However, investors must carefully evaluate liquidity constraints, fee structures, valuation transparency, and perform comprehensive manager due diligence when investing in UK LTAFs.
References: 1. UK LTAF market growth 2. Morningstar LTAF guidance 3. LTAF liquidity concerns 4. LTAF due diligence 5. Investor education in LTAFs 6. LTAF risk/return expectations 7. US and UK asset managers eyeing LTAF launches 8. Morningstar LTAF data 9. Gkeka on LTAF growth
- When investing in UK Long-Term Asset Funds (LTAFs), it's essential to take into account their unique illiquid nature, as investors may face limited liquidity and extended lock-up periods, especially for private real-estate assets [1][3].
- Investors should be prepared for heftier fees associated with LTAFs, and evaluate the fund manager's valuation policies, operational controls, and regulatory compliance to minimize valuation risks and ensure sound investing in real-estate and other long-term assets [2][4].
