The FCA is to consult on introducing a new type of open-ended fund which invests in long-term illiquid assets.

The regulator proposes a new category of fund - Long Term Asset Funds (LTAF) - designed to invest “efficiently” over the long term in assets hard to sell quickly.

The funds would be able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure.

The watchdog says the new fund category would provide a fund structure through which investors can invest with confidence in less liquid assets.

There has been criticism in recent years over the frequent suspension of property funds due to liquidity problems and the regulator has also today published feedback on its property fund consultation and the next steps.

One of the aims of the new LTAF funds is to help businesses and fund infrastructure projects and wider economic growth.

Chancellor Rishi Sunak outlined the funds in his statement to Parliament on the Financial Services bill on 9 November. He committed to the first Long-Term Assets Fund being launched within a year. 

The LTAF rules would include longer redemption periods, high levels of disclosure, and specific liquidity management and governance features. Some experts have suggested longer notice periods for illiquid funds to avoid suspensions.

LTAFs would offer an alternative investment opportunity for experienced retail investors, says the FCA, and may also appeal to defined contribution pension (DC) schemes. 

A recent survey commissioned by the Department for Work and Pensions (DWP) found that two thirds of DC schemes do not invest in illiquid assets, while the remaining third invest between 1.5% and 7%, according to the FCA.

Nikhil Rathi, chief executive of the FCA, said: “It is important for overall economic growth that the financial system supports investment that may take time to deliver a return. 

“This is in addition to the potential benefit to investors themselves. We think our proposals would enable the establishment of authorised funds that are appropriate for both professional investors and sophisticated retail investors that want this type of investment risk and opportunity.”

Consultation on the proposals is open until 25 June.

• CP21/12: A new authorised fund regime for investing in long term assets