Investment strategies for listed funds have widened in scope in the past 12 to 18 months, according to Tom Attenborough, Head of Large Caps, Primary Markets at the London Stock Exchange (LSE).
Attenborough, who was speaking as part of a panel of experts at the Guernsey Funds Forum 2015 in London earlier this month, said he agreed with the event’s keynote speaker Guy Hands, Chairman and Chief Investment Officer of Terra Firma Capital Partners Limited, that investors were once again far more willing to take risk. Attenborough said it had resulted in a diverse issuance calendar with trends emerging in the areas of alternative energy, leasing, microcap equities, debt-collective strategies and non-bank lending.
“The listed fund market is certainly evolving. It has been hugely active in recent times. And yes, there have been a wide variety of different investment strategies that we have seen come through with listed funds in the last 12, 18 months,” said Attenborough.
“I think whilst we at the LSE have not specifically been encouraging esoteric, and the more sort of wild and wacky, investment strategies, clearly, going back to what Guy said, risk appetite has got ever greater. The dialogue between what managers want to do and what investors are prepared to tolerate has been very, very healthy, and that is why I think you are seeing a proliferation of the sort of transactions that can get done.”
From an LSE perspective, Attenborough said the market operator had to be wary and ensure that standards were kept high and that the correct route to market was taken.
“There is the Main Market, there is the Specialist Fund Market (SFM), and indeed AIM, which have all got slightly different investor constituencies. I think if you are bringing something particularly exotic, particularly new, the expectation would be that you take it to the SFM, which is a more dedicated institutional market, rather than tapping into the broader investor world and retail, for example. We at the LSE are conscious of trying to make sure, and working with regulators, that the disclosure is right and transparent. And that people are guided to what we feel might be the right market.”
Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), says the size of funds had also been on the increase with investors once more being attracted by larger IPOs and the additional liquidity those funds possess.
“I had a look back over 10 years and worked out what the average size of the IPO was. I looked at the boom years – I didn't look at the crisis years, because that affected everything – and in 2006-7, the average size of an IPO was GBP150 million. In the last two years, which have been sort of boom years as well, it has almost doubled from that.”
Sayers said research by Winterflood had shown that discretionary managers, who were consolidating and getting bigger, were now after larger funds. He said that in just one year the percentage of managers who would consider investing in a fund below £100 million had fallen from 70% to 50%, with the research going on to say that managers wanted funds of “£200 million, or even £250 million.”
“The other thing we have seen in the sector is smaller launches at the start, which then try and grow pretty rapidly afterwards,” said Sayers.
“That is part of the reason, again, why if you look back before the financial crisis, IPOs exceeded secondary fundraising almost every year. After the crisis, secondary fundraising has taken over. There have been other reasons for it, premiums and things like that, but it just has the people to grow. We have had quite a few funds start sub-£100 million and grow, and it becomes a virtuous circle, because as soon as you get up to £150 million or £200 million, another group of investors suddenly becomes interested in it.”
However, while Sayers believes the average size of IPOs was on the rise, he and Ravi Anand, Head of Corporate Finance and an Executive Director at Dexion Capital, both expect to see a reduced level of total fundraising during 2015 compared to 2014.
Anand said: “The reason I think we are going to see probably less fundraising this year than last is that there is quite a bit of indigestion in the market. There has been an awful lot of product raised and an awful lot of product raised around similar themes. What people don't need is six versions of the same product, right? Because what people want is size, and I think what we will see is a lot more secondary issuance of existing vehicles, because people, really most of the allocators, are beta allocators. They are filling a part of their bucket. So it could be alternative credit, it could be infrastructure, or whatever, but representing illiquidity in their portfolios.”
Anand added that while people were after the best manager they could get, they also wanted a fund with critical mass and one capable of trading in reasonable size.
“I think we are beginning to see that right now. People are backing their horses, and carrying on backing the same horses. Of course size begets size, so if an investor is not allocated today, and a fund exists, they will perhaps allocate down the line. And therefore the IPO train comes slowly, not to a halt, but it just slows down somewhat.”
The Guernsey Funds Forum 2015 was held at the new etc. venues, 155 Bishopsgate, on Thursday 18 May and attracted more than 500 attendees.
