After several tough years for fund raising there has been a lot of good news recently about listed funds in general and a number of high profile London stock exchange listings in particular. This article will summarise recent activity in the sector, seek to explain why the sector is performing so well and then explain the attractiveness of these investment vehicles to investors.
The good news
It has been a great year so far for the listed investment company sector. Numis Securities in their half yearly review describe the first half of the year as "a vintage period for the investment companies sector, with tightening discounts, improved trading liquidity, and significant new/ secondary issuance".
This follows on from announcements by the Association of Investment Companies (AIC) that the assets under management in the investment company sector broke through £100 billion for the first time on 1st February 2013. (It's now up to £105 billion). More recently in July the AIC announced that 2013 has seen the narrowest discounts in the private equity sector since before the credit crunch in 2008. The average private equity discount reached the narrowest average level of -13.8% at the end of February 2013.
Closer to home for me Guernsey Finance continues to note that Guernsey is home to more non UK incorporate companies than any other jurisdiction. The Guernsey Finance website is littered with press releases describing new and proposed listed fund launches domiciled in Guernsey.
Recent activity in the London listed funds sector
In the first half of 2013 there were significantly ten new Initial Public Offerings (IPOs) in London raising £1.54bn. Of these five are Guernsey incorporated, three UK incorporated and two are Jersey companies. This compares extremely well to the number of IPOs which took place in 2012. (11 in total which raised £1.1bn.) As Vice Chairman of the Guernsey Investment Fund Association it's extremely pleasing for me to note that Guernsey retains a dominant market share.
The five Guernsey incorporated companies which launched in the first half of the year were:
Doric Nimrod Air 3, Twenty Four Income Fund, JPM Global Convertible Income, Weiss Korea Opportunity, ICG Longbow UK Property Debt.
Of these five Guernsey domiciled companies three were main market listings with Weiss Korea Opportunity being an AIM listing and Doric Nimrod Air 3 being dual listed on the Specialist Funds Market and the Channel Islands Stock Exchange (CISX).
The Guernsey domiciled IPOs
Doric Nimrod Air 3 was the third investment company of its type to launch, raising £211m and will acquire four A380 aircraft which will be leased to the Emirates airline. Carey Commercial Limited has acted for all three Doric Nimrod Air entities with respect to their CISX listing.
Weiss Korea Opportunity Fund raised £105m to invest in listed preference shares of South Korean companies that are trading at discounts to their respective common shares.
TwentyFour Income Fund raised £150m to invest in a portfolio of 30-50 floating rate, asset backed securities, primarily Residential Mortgage Backed Securities in the UK and the Netherlands, with a net target total return of 7-10% per annum.
JP Morgan Global Convertible Income raised £136m in June and will include 60-80 positions, broadly diversified by both geography and sector.
ICG Longbow raised £104.6m and invests in primary non-syndicated senior loans secured against UK commercial property
In July two more Guernsey domiciled, London stock exchange listed funds were launched: Bluefield Solar Income raised £130million to invest in UK-based income generating solar assets focussed on large scale industrial and agricultural plants while interestingly The Renewables Infrastructure Group (TRIG) was marketing at the same time and raised £300 million to invest in onshore wind and solar photovoltaic energy generation assets.
Attracting yet more capital to the sector and hitting the front page of the Financial Times is a fund launched by City superwoman Nicola Horlick's fund management company, Glentham Capital, which has raised a record amount of seed capital, £150k, via a website called Seedrs. The fund is aiming to raise US$100 million and provide finance for Hollywood films.
Secondary issuance
Guernsey fund promoters have also been active with additional fund raisings for existing funds. While new issues in the first half of 2013 raised £1,535 million secondary issuance was responsible for £1,576 million.
With Guernsey's bias towards illiquid alternative asset classes and the popularity of these vehicles many of which are trading at a premium to net asset value it should be no surprise that the largest single issue was a C class share issue to date in 2013 was by Guernsey domiciled NB Global Floating Rate Income fund which raised £364m.
Three Guernsey domiciled infrastructure funds raised significant additional capital in the first half of 2013: HICL Infrastructure raised an extra £172 million, International Public Partnerships raised an additional £51.9 million and John Laing Infrastructure raised £37.1 million demonstrating the continued popularity of infrastructure as an asset class.
In the debt fund arena Alcentra European Floating Rate Income Fund, which launched in March 2012 to invest in senior loans in Europe, is to hold a series of placings following a successful C class share issue in December 2012, which added £16.4 million. TwentyFour Income Fund, which only launched in March 2013, raised an additional £31million in June and NB Distressed Debt raised $38.4 million in early July.
It's not just London listed funds that are doing well
As well as dominating the London stock exchange with respect to offshore funds Guernsey is also home to the Channel Islands Stock Exchange which has also enjoyed a great start to 2013.
The CISX admitted it's 5,000th security to its official list in 2013, its 15th year of operation. While 2012 saw more listings, 510, than in any other year since 2008, the first quarter of 2013 was a record breaking quarter with 150 securities admitted to the official list.
Of course Guernsey is not only the domicile of choice for listed investment funds. It also continues to attract large private fund raisings. Following the same theme as many of the listed funds Blue Water Energy LLP raised $861 million for a private equity fund which will invest in the energy sector.
Why is the sector performing well?
It could just be because the market in general has risen. The FTSE 100 came close to its all time high in May 2013. The success of the listed funds market is clearly correlated to the wider market and there seem to be fewer concerns in the media about a possible Euro crisis or another banking crisis now that at any other time since 2008.
One clear reason however for the relative strength of the investment company sector is the type of assets which closed ended London listed funds invest in. These tend to be illiquid assets like debt, property, private equity and infrastructure. Low interest rates have driven demand for income generating funds. As income-generating assets like property are illiquid this has made fundraising for closed ended funds easier. All but one of the London listed funds launched in the first half of the year pay a yield of 4.5 per cent or higher.
A second reason may be the impact of the Retail Distribution Review (RDR), which came into force in January 2013. The investment company sector has long anticipated that a switch away from commission-based sales by Independent Financial Advisors (IFAs) would have a beneficial impact on sales of listed funds (which do not pay commission to IFAs). This could be for two reasons; one IFAs being paid by the hour are more likely to be aware of listed funds and advise potential investors to consider them in their portfolio alternatively private investors dispense with IFAs altogether and go straight into London listed funds because of the publicity surrounding them and the coverage they receive in the financial press. It's early days for the post RDR world and very difficult to quantify
A third reason may be that with fund raising being generally still difficult fund managers who would ordinarily launch a private closed ended funds sold directly to institutional investors are being pushed towards smaller investors and are more willing to consider the listed investment company as a structure.
The attractions of closed ended listed funds to investors
The key attraction for investors is that they may wish to access illiquid alternative asset classes but may not have sufficient capital to be a limited partner in a classic private equity style fund and they may prefer to have the opportunity to benefit from the liquidity possible with a listing.
If you wish to invest in illiquid assets like property and private equity then a closed ended fund structure is the most appropriate fund style. Some managers continue to run successful open-ended funds investing in illiquid assets but during the credit crunch these have proven to be the exception rather than the rule. Open-ended funds with illiquid assets during the credit crisis soon became closed-ended with suspensions to dealing and gates being invoked to prevent redemptions.
The attraction of a listed fund is that if an investor wishes to then he can sell his shares in the fund on the market. Often fund shares are trading at a discount to net asset value and sometimes there is a limited amount of liquidity in the market. One asset manager I spoke to explained that the key here was not to own more than 3-5% of any given fund and then if he decided to liquidate a position with the prevailing trading in the market he could expect to sell out of the position over the course of 10 working days.
While historically listed funds were sold direct to the public they are increasingly used by professional investment managers, stock brokers and private banks investing on behalf of private clients to diversify their client portfolios and add some risk to more sophisticated clients who wish to have exposure to alternatives.
One of the key drawbacks for this style of investor has been that participating in an IPO has had a negative impact on the performance of the portfolio management because the shares are marked to market price and not to the net asset value of the fund and these funds have regularly traded at a discount to NAV.
For this reason it has been easier for managers to fund raise for secondary issues from existing funds rather than brand new issues. With market sentiment improving, discounts narrowing and many income-generating funds trading at a premium this is no longer the issue it was.
Conclusion
Summer is over, the schools are back and after a great start to 2013 I'm hoping to see this impressive run of positive investor sentiment regarding listed funds continue into the Autumn term and the lead up to Christmas.
If you are a fund manager aiming to launch a new alternative investment fund it seems that now is a great time to consider a closed-ended investment fund launch, and you will probably be advised to domicile the fund in Guernsey.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
