A rewrite of a three year old document
TPR has issued guidance to Trustees on how to invest in private markets.
It claims to be “new” but it is not, this is a document that reads like it was written a year ago. At a time of dynamic change , that is simply not good enough
TPR has been captured by the funds lobby and the PLSA and is quite ignoring the principal means to access these markets – investment companies. For background read William Macleod’s linked in post and then watch the debate in the House of Lords earlier this week on this subject.
TPR is clearly behind the times in understanding the accessible market for illiquids. It refers trustees to the work of the productive finance group, supported by studies by the PLSA. This information was produced in 2021 and 2022.
The latest Government produced document is the consultation response by the DWP published in 2023. Since then the Chancellor has set out his Mansion House Agenda and we have seen the Compact.
The flight of capital from the London Stock Exchange
The UK is the only major developed market where the number of reasonably liquid stocks has actually shrunk over the past two decades. https://t.co/5puFI8PMKl pic.twitter.com/YsRLORBclD
— Robin Wigglesworth (@RobinWigg) January 23, 2024
The recent flight from London listings has been accompanied by a deep slump in the fortunes of FTSE 250 investment companies, many of which are trading at a discount to valuation of a third or more.
The FCA and the Treasury have embarked upon reform of the European disclosure regulations which have been misapplied to disclosures for investment trusts and a range of politicians both in the Lords and in the Treasury have confirmed the Government’s commitment to supporting the use of these investment companies as a route to market by pension schemes.
It is as if none of this has happened. Instead, the Pensions Regulator is exclusively promoting funds as the means to access illiquid investments. It is as if it matters more to support the funds industry than the capital markets. Open ended funds have considerable issues, none of which are discussed in this guidance, for all their problems closed end investment companies offer liquidity at what the market is prepared to pay. We may not like Investment Company valuations but at least we can trust them.
Here then is its guidance to DC Trustees.
There are several routes through which DC pension schemes could access less liquid assets. The guide investing in less liquid assets: key considerations, published by the Productive Finance Working Group, sets out key features of the three types of open-ended structures that are likely to be most relevant to DC schemes:
- long term asset funds (LTAF)
- professional open-ended investment funds
- unit-linked life policies
Some other funds that are structured as Non UCITS Retail Schemes and operate as Funds of Alternative Investment Funds (NURS-FAIFs) can also invest in less liquid assets. These are FCA regulated funds which may be used by a wide range of investors including DC schemes. However, the LTAF structure, which was designed with the default arrangements of DC pension schemes largely in mind, is expected to be more widely used for these type of less liquid asset investments.
The section in the guide titled ‘Guide to the fund structures to access less liquid assets’ sets out key features of these individual options.
My bold highlights references to funds and life policies. There is no reference to direct investment in private asset or investment in closed companies – investment trusts.
As Baroness Altmann points out, we have done our best to throttle investment trusts with regulatory red tape, now we are guiding trustees away from them in favour of fund intermediation. This is not right.
If we are to have regulatory guidance in this dynamic area , it needs to be on the money not behind the curve. The FCA and TPR should be working as one in this area but I can see little sign of it. It seems that TPR has drawn up the bridge at the start of last year and has published this guidance a year on.
They appear the victims of regulatory capture by the funds industry, promoting a handful of LTAFs and the few open-ended funds that have what limited exposure they are allowed. The unit linked life policies are of course subject to the permitted links regulations making them largely ineligible for the kind of illiquid investments (unless wrapping an LTAF).
In short, the Pensions Regulator has published guidance which will shape the market in 2024 and beyond , based on anachronistic information and funds which are largely regarded as not fit for purpose. Meanwhile it is almost entirely ignoring the companies that make up a third of the FSTE 250 which are struggling to deliver to the Mansion House Agenda.
This regulatory capture by the funds industry is deeply unfortunate and needs to be immediately addressed. This guidance is simply not fit for the current purpose.
