Less risk, more kudos on the stock exchange

The question of whether investment funds would benefit from listing on a stock exchange is becoming an increasingly important one as the numbers listed continue to grow.

The principal benefits usually claimed for listing include greater liquidity and transparency. Investors also benefit, at least theoretically, from the stricter corporate governance requirements placed upon listed entities.

“For the investment manager, a listed investment vehicle provides the ultimate lock-up period for committed capital – it is by definition permanent,” observes Daniel Richards, a partner at Ogier, a multi-jurisdictional offshore law firm. “For the investor it provides the liquidity normally associated with an open-ended vehicle, provided by trading units in the fund in the secondary market, rather than by regular redemption opportunities provided by the vehicle itself.

“For certain institutional investors there is an added bonus, in that listed equities commonly carry a lower risk-weighting than unlisted securities and so institutional investors may be less restricted by regulatory, capital adequacy or internal investment allocation requirements in investing in the listed fund,” says Mr Richards

“Competitive pressures in global markets have identified, as an innovative model for stakeholders, the combination of an offshore fund, listed on a high profile onshore stock exchange. This combination delivers value/profit preservation, appropriate regulation and investor protection, flexibility and liquidity,” he adds.

The imperative to list is a powerful one, driven, ultimately, by the customer. “We always want to list on a recognised stock exchange,” says Ian Pascal, marketing director at Baring Asset Management, part of the MassMutual Financial Group. “Our target customers would prefer that.” And where will those listings be? In marketing terms, he explains that what works best depends upon client preferences. “If clients are based in the UK, it makes sense to list in the UK, in London,” he says. “If the investors are international but not US, Dublin or Luxembourg will be fine. For US-based investors funds must be listed in the US. For closed-end funds, the main centre is probably London, followed by Dublin and Luxembourg, and even the Cayman Islands.”

“A primary listing on the main market of the LSE is still the best you can get,” says Michael Campbell, director, investment trusts at F&C Asset Management in Edinburgh. “Alternatively there is the less regulated AIM, which saw 36 new issues by investment companies in 2007, or Euronext in Amsterdam.”

In fact, he says, it was the number of investment companies starting to list in Amsterdam that prompted a debate in London about the need to deregulate, and has led to the abolition of the requirement for investment companies to obtain a secondary listing under Chapter 14 of the LSE rules and the introduction of a lighter-touch regulatory regime under Chapter 15 for primary listings.

“This will allow a wider range of investment strategies to be pursued and should attract more specialist and alternative investment funds to list on the LSE. The UK tax rules, however, have not been updated, so it is likely that many new investment companies will continue to be domiciled offshore, whilst benefiting from the LSE primary listing.”

The London Stock Exchange launched its dedicated market for issuers of specialist funds last November. The Specialist Fund Market is described by the LSE as the only specialist venue dedicated to appeal to sophisticated investment managers and their audience of investors and provides sufficient flexibility for specialist vehicles – such as single strategy hedge funds and private equity vehicles.

It has been designed to satisfy a market need between AIM and the main market, giving a baseline level of transparency and disclosure in a part of the investment world that traditionally thrives on opacity and secrecy.

“Despite recent stock market conditions, interest in admission to the SFM has remained high,” says Andrew Wallace, senior manager at the LSE for the new market.

Words of warning are being voiced elsewhere, though.

While one asset manager says the differences between the different regulatory regimes are essentially negligible, another observes that UK companies could lose business because of the more favourable tax and accounting treatment for funds in offshore centres.

Mr Richards of Ogier is sanguine. “The combination of an offshore company or limited partnership with an onshore listing seems to provide the optimum model for investors and suggests a more upbeat conclusion in respect of London as an open, global financial centre and highlights the value of these services as invisible exports. In short, it is a good news story for London rather than a negative one.”