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How DIY investors can gain exposure to illiquid assets

by LLB Editor
6th Aug 21 7:04 am

The PM and Chancellor are trying to ignite an ‘investment big bang’ to encourage investment into illiquid assets in the UK.

The FCA is currently consulting on creating a new fund regime for a Long Term Asset Funds (open-ended funds which invest in illiquid assets) – the Chancellor has told parliament one will be launched by November.
DIY investors can already gain exposure to illiquid assets through investment trusts, VCTs, EIS and some open-ended fund in the property sector.

Laith Khalaf, head of investment analysis atAJ Bell, comments: “The Prime Minister and Chancellor are trying to get big pension funds to invest in unlisted companies to boost the UK’s economic recovery, but DIY investors can already gain access to illiquid assets like private equity, infrastructure and real estate within their SIPPs and ISAs.

“Investment trusts offer investors access to these hard to reach areas of investment markets, because their closed-ended structure means they don’t have to sell underlying investments to meet investor withdrawals. The cost of that liquidity is reflected in the premium or discount the investment trust is trading at, which adds to the volatility of the investment. This is an area where investors do need to tread with caution, and should only have a small part of their portfolio invested, and be comfortable with the risks involved.

“Investors can also invest in small unquoted companies through VCTs and EIS, while capturing valuable tax breaks. These are high risk investments only suitable for the most adventurous investors, and must be held for the long term in order to qualify for the relief that is paid up front.

“Illiquid assets have caused problems when married with open ended fund structures in the property sector, and in the collapse of the Woodford funds. Nonetheless the Chancellor is pursuing the creation of Long Term Asset Funds, which will be open-ended and yet invest in illiquid assets like infrastructure, private equity and real estate. In doing so, the government is trying to harness the vast wealth in pension funds to fund a large part of its green agenda, while also boosting the economic recovery by funnelling investment into small UK companies. The compromise will be the Long Term Asset Funds will have long notice periods, 90 to 180 days, perhaps even longer, so the managers can deal with investor withdrawals appropriately.

“Institutional pension funds don’t like to put money in investment trusts because of their ability to trade at a discount or premium, and their volatility. But many private investors are well practiced in buying investment trusts in their portfolios, and these vehicles already do a good job in providing exposure to illiquid assets, albeit with all the risks inherent in that approach.”

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