The Ontario Securities Commission (OSC) is exploring the idea of creating a new type of investment fund to expand retail investor access to illiquid long-term assets, such as infrastructure projects.
On Thursday, the OSC published a consultation paper that sets out its initial vision for a new investment fund category, the Ontario Long-Term Asset Fund (OLTF). This type of fund would allow retail investors to more easily gain exposure to the kinds of assets that aren’t typically available through conventional funds — such as infrastructure and natural resource projects, along with venture investments, private equity and debt.
These funds could provide retail investors with opportunities “to participate in capital-intensive projects, while enabling businesses to lower funding costs and raise the capital necessary for growth,” the paper noted.
The paper sets out the regulator’s views on proposed features of these new funds — such as tailored redemption and valuation requirements — that it said would be needed to address the characteristics of funds that invest in long-term assets instead of typical fund holdings, such as publicly-traded equities and debt.
“Under the proposal, OLTFs would not be subject to the illiquid asset restrictions applicable to other investment funds,” the paper said. “However, they would need to address inherent risks associated with long-term assets, such as liquidity, volatility, concentration, duration, and informational asymmetries, by incorporating robust requirements and protections.”
For instance, the paper suggested that these funds should offer redemptions at least annually, but no more often than monthly.
“Longer frequencies would benefit OLTF liquidity management. Shorter frequencies would benefit the liquidity preferences of investors,” the regulator said.
These funds would also be required to obtain independent valuations of their assets at least annually, and possibly more frequently, depending on the nature of the assets and the redemption terms of the fund. As well, they would be subject to added governance requirements to ensure the atypical risks and challenges of these funds are being managed properly.
The proposal envisions these funds being sold through investment dealers that are overseen by the Canadian Investment Regulatory Organization, or by registered portfolio managers, subject to suitability, know-your-client and know-your-product requirements.
The proposal is out for comment until Feb. 7, 2025 to give investors and industry firms sufficient time to provide the regulator with feedback.
“Long-term assets provide a unique opportunity for investors to diversify their portfolios and potentially achieve higher returns over an extended period. Through this consultation, we hope to identify how to broaden investor access to these benefits while also mitigating the risks inherent in illiquid assets,” said Raymond Chan, senior vice-president, investment management with the OSC, in a release.
“The long-term asset fund proposal aims to create a framework that protects investors while fostering innovation and capital formation.”