In 2023 the Financial Conduct Authority set out new rules to give retail investors and more defined contribution pension schemes access to long-term asset funds.
“For years defined benefit investors have had access to private markets, offering them potentially enhanced returns and diversification benefits,” says Mary Cahani, head of defined contribution client engagement at Invesco.
“In contrast, DC and retail investors have predominantly only had access to traditional assets like equities and fixed income, leaving them potentially vulnerable to market volatility. This disparity raises concerns about the future financial security of these investors.
“However, by broadening their investment horizons to include these alternative asset classes, they can also enjoy the same potential diversification and risk-return profile at a portfolio level.”
A higher risk product, the regulator noted that LTAFs can provide greater diversification in exchange for potentially higher returns, but less immediate liquidity and longer redemption periods.
So to help protect consumers, LTAFs are subject to additional protections under the Financial Conduct Authority's high-risk investment framework, including risk warnings and customer assessments.
Ben Leach, head of private market solutions at WTW, also describes diversification as a major benefit of expanding retail investors and pension savers’ access to private markets.
“If you take equity for example, you've got less than 50 per cent the number of companies listed on stock markets today than you did 20 years ago,” he says.
“So you've got an enormous opportunity in the private sector; companies that a lot of retail investors, different types of pension scheme investors, are not necessarily getting access to today that can be large drivers of growth.
“And if you think about the amount of capital that has flowed into for example, private equity, the increasing burden and cost of being a public company, you've got an enormous number of private companies staying private for longer, because they don't need to come to the equity market to access expansion capital and so a lot of that growth happens as companies are private.”
The FCA introduced rules last year to enable a broader range of retail investors and pension schemes to “appropriately” access LTAFs, while ensuring they understand the risks.
With different ways to access private markets, how investment is implemented is also important, says Isio partner George Fowler.
“Private equity or venture capital is potentially one of the more higher returning aspects of private markets, and therefore can have a significant impact if done well. But that is maybe more appropriate for a younger member.
“Generally, they've got a longer period to focus on, so they can accept the additional volatility that comes with that higher return.
“At the other end, you could look at an asset class like private debt. Now that will typically be targeting a much lower return, and that's more about income. So you could look at that and say that is less appropriate for a 20-year-old, where they're very focused on getting the best return possible; but it's more appropriate for an older member who potentially doesn't need that higher return, but is looking for a smoother income stream.”
