On February 8, the UK Financial Conduct Authority (FCA) published a discussion paper (Paper), seeking stakeholder views on open-ended funds investing in illiquid assets.
One of the difficulties highlighted in the Paper is the liquidity mismatch that is created when an investor wishes to withdraw its money on short notice, when illiquid assets cannot be sold to meet such redemption requests. The FCA notes that this can be exacerbated by market triggers, as was seen in relation to real estate funds in the aftermath of the announcement of the result of the Brexit referendum—which led to funds with aggregate assets under management (AUM) in excess of US $23 billion being forced to suspend redemptions. Another issue that the FCA has highlighted is that there are difficulties in pricing interests in funds investing in illiquid assets due to asset valuations for such funds rarely happening on a daily basis.
The FCA is seeking comment as to whether or not changes to the regulatory approach are required. The FCA requests that any comments on the Paper be submitted by May 8, 2017.