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We understand that these rules are intended to facilitate liquidity in a fund where it is intended to sell assets quickly to meet redemptions. The disadvantage of securing loans at a higher loan to value over a smaller number of assets is that it increases both default risk and borrowing cost. The provisions in COLL make no sense for a fund that does not intend to sell assets at short notice to meet redemptions. The consultation recognises that:
a) Selling assets at short notice in stressed situations is only one course of action for daily dealt funds and the implication in the consultation is that this may not be the preferred option;
b) Limited redemption funds will not face the pressure to make distressed sales of assets.
We believe that it is more appropriate for managers to set determine appropriate mortgage arrangements within the 20% limit to match the liquidity plan for the fund.
FCA patient capital proposals
In December, the FCA issued two further documents, Consultation Paper CP18/40, "Consultation on proposed amendment of COBS 21.3 permitted links rules”, which you can find here and Discussion Paper DP18/10, "Patient Capital and Authorised Funds" which you can find here. They are closely related and are both open for comments until 28th February 2018. In 2016, the government launched a review looking at “patient capital” investment. In this context, ‘patient capital’ refers to a broad range of alternative investment assets intended to deliver long-term returns; for example, real estate, infrastructure private equity, corporate debt and venture capital. The consultation goes on to say that “these assets are typically illiquid and often require a committed investor willing and able to tie up their capital and forgo on-demand liquidity or an immediate return on investment”.
The two documents consider two aspects of opening up patient capital investment:
a) Amending the “permitted links” rules to allow investment by insurance linked products. This is important as many defined contribution pension schemes are invested through insurance linked products. John also identified in his report for AREF in 2017 that the challenges of daily pricing are common to retail investors investing through model portfolios, defined contribution pension schemes and unit linked insurance products.
b) The second paper is a discussion paper on allowing authorised funds that can be marketed to retail investors and authorised funds that can be marketed to professional investors to invest in patient capital assets. It does not provide any answers, but at least asking the questions gives the industry the opportunity to respond.
The broader discussion opportunity in the second document is of wider interest than the relatively narrow technical point in the first.
The points raised in respect of open-ended property funds in terms of the deferral option and changing borrowing restrictions are also relevant. John attended the FCA open meeting on the proposals on 17th January and made this point.
The discussion document also raises the possibility of the establishment of a new type of fund for investment in long term assets. We will follow this closely as we believe that there is a need for more flexible onshore fund vehicles that are not encumbered with the restrictive rules of the existing UK authorised fund regulations.