Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
A couple of decades ago market wags liked to quip that private equity appealed to those who disliked looking at a Bloomberg trading screen.
Share prices on public markets can fluctuate wildly, causing consternation. Today, investors can curb such stresses by buying shares not only of listed private asset managers, but also of different funds investing in private equity, private credit and infrastructure.
One option gaining traction with retail investors is very much in the spotlight right now, the relatively new long-term asset fund (LTAF), which are semi-liquid funds that some wealth managers have been keen to promote in recent months.
But if individuals want exposure to private assets, they have a 150-year-old alternative they can use: investment trusts.
Trusts that specialise in picking a diversified portfolio of unlisted holdings and PE funds have been operating for decades. So do LTAFs really make more sense for ordinary investors?
The push to empower individual investors, not just big institutions and the very wealthy, to put their money into private assets has been palpable — coming both from government and the industry.
“Five years ago, private assets weren’t even part of the conversation [with clients],” says Fahad Kamal, chief investment officer at Coutts. “Today they are.”
But rarely do those conversations seem to revolve around traditional investment trusts. So if not, why not?
Not including property and venture capital trusts, there are 72 UK-listed investment trusts covering private equity, private credit and infrastructure, according to the AIC. These vary in size but some have portfolios worth more than £3bn.
Private asset investment trusts will typically have higher liquidity than LTAFs, depending on their size, making them easier to buy and sell for those with smaller holdings. “The trusts do have more liquidity. You or I can sell tomorrow,” says Alan Gauld at Patria Private Equity, an investment trust. “But as you get bigger as an investor and liquidity is less important, probably the LTAFs are more suitable.”
LTAFs, first approved by regulators in 2021, were initially targeted at defined contribution pension funds as another means to invest in long-term private investments. Today, LTAFs are also meant to offer a more liquid means of putting money into private assets.
But individuals should understand that allowing monthly purchases of LTAFs, with at best quarterly redemptions, compares unfavourably with investment trusts, which can also invest in everything from private equity to infrastructure but trade daily.
One relatively recent change for pensioners may help these newer funds, says James Lowe, director in private markets at Schroders Capital. “LTAFs can now be held in a Sipp [a self-invested pension plan] which is very useful. And the plan is for these to go into Isas from April next year.”
Schroders Capital began marketing LTAFs through the Hargreaves Lansdown retail platform in September. Rivals such as AJ Bell have so far chosen not to offer LTAFs to their clients, claiming insufficient demand.
There are other considerations as well, such as governance. LTAFs are regulated funds without the independent oversight of a board — a feature of investment trusts. This distinction has mixed results. Boards have struggled to eradicate persistent discounts to the net asset values of the holdings. Even the largest private asset trusts may have discounts exceeding 30 per cent.
But boards can reduce fund fees. That occurred at Greencoat UK Wind, one year ago, when the board negotiated a drop in annual management fee it pays fund manager Schroders Greencoat — saving shareholders an estimated 19 per cent by adopting a formula using the lower of market capitalisation or net asset value. LTAFs theoretically will trade at NAV in the case of a redemption, but fees are decided by the managers.
Much depends on risk tolerance and how easily one can look away during market volatility. “LTAFs are designed for long-term investment, so investors for whom an LTAF is suitable do not usually mind that they cannot exit their investments as quickly,” says Richard Dooley, a partner at law firm Simmons & Simmons.
Yet the discounts on some trusts point to potential value. “Investment trusts are not necessarily better, but they are simply overlooked,” says Steven Tredget at Oakley Capital.