London Stock Exchange launches specialist market for alternative funds

Date: Friday, July 13, 2007
Author: Hedgeweek.com

The London Stock Exchange has responded to the impending closure by the Financial Services Authority of the light-touch Chapter 14 listing regime used by foreign-based alternative funds by establishing a dedicated market for funds as an alternative to a full listing on the exchange's Main Market.

The initiative represents a bid by the exchange to uphold London's attractiveness as a venue for the listing of alternative funds and take the competition to Euronext Amsterdam, which has already established a strong position in the market following the listing of funds last year by Kohlberg Kravis Roberts, Apollo Management and Marshall Wace.

The Specialist Fund Market aims to meet demand from both issuers and institutional and other sophisticated investors for a quotation on a regulated market in London that provides sufficient flexibility for specialist vehicles such as single-strategy hedge funds and private equity vehicles. The market will be clearly flagged as for professional investors, although this will not stop retail investors from accessing funds listed there if they insist on doing so.

'It's a very creative solution, the first market of this kind in the world,' says Jonathan Baird, a partner with law firm Freshfields Bruckhaus Deringer. 'The attempt by the UKLA to open up regulated markets in London to less run-of-the-mill investment products may have been batted back by industry groups, but there is still a lot of demand from institutional and sophisticated investors for access to complex listed investment entities.'

Last week the FSA confirmed that alternative investment funds would no longer be able to take advantage of a secondary listing regime under Chapter 14 of the UK's listing rules once a new unified regime for the listing of investment entities is in place early next year.

The new market will impose the minimum regulatory standards prescribed by the European Union's Consolidated Admissions and Reporting Directive, as does the Chapter 14 route to admission on the Main Market, which will be abolished when the FSA introduces a new unified regime for listings.

According to the exchange, the Specialist Fund Market will satisfy a market gap that will exist between the Alternative Investment Market and the Main Market once the new regime is in place early next year.

'Hedge funds and private equity are an increasingly important asset class that pension funds and other institutional investors want access to in order to diversify their overall portfolios and improve their returns,' says Martin Graham, director of markets at the London Stock Exchange.

'We already offer investors and issuers a choice of routes to market according to the types of investors that issuers wish to target and the risk premiums sought by investors. The introduction of the Specialist Fund Market enhances that choice by creating a separate, clearly labelled market for alternative assets such as single strategy hedge funds and private equity vehicles.

'It will enable the London markets to continue to meet what we know is a strong demand among issuers and investors for a regulated market quotation suitable for these more complex entities, while remaining clearly delineated as a professional market.'

The Specialist Fund Market will be open to both UK and international funds, and will complement to the FSA's proposed unitary regime for investment entities listing on the Main Market. The exchange believes the latter may well continue to appeal to funds targeting a wider audience, including retail investors, or that seek inclusion in index tracker funds. Meanwhile AIM has also been successful in attracting investment vehicles including property funds and conventional investment funds.

'The launch of a new London-based specialist fund market should help to remove any uncertainty for groups that are planning to launch closed-ended funds in London via Chapter 14,' says Mick Gilligan, a partner and director of fund research at stockbroker Killik & Co. 'Allowing greater access and liquidity to single strategy hedge funds and feeder funds should serve to further increase the range and choice of alternative investment funds and help to establish London as a global centre for such vehicles.

The Specialist Fund Market will be a regulated market operated in accordance with EU Directives. The FSA will approve issuers' prospectuses in line with the Prospectus Directive and monitor issuers' conformity on an ongoing basis with the Transparency Directive, Market Abuse Directive and other EU legislation.

Once approved by the UK Listing Authority, securities must also meet the exchange's admission and disclosure standards in order to be admitted to trading on dedicated segments of the SETS and SETSqx trading services. Specialist Fund Market securities will not be included in the FTSE UK Index Series and will therefore not be included in index tracker funds.

Baird argues that the decision to close off the Chapter 14 route for alternative funds and create a unified listing regime was a victory for those who see the Main Market as a more retail-oriented market. 'The exchange has done quite a neat move to fill the gap,' he says. 'There's a lot of demand for the listing in London of funds that are not intended for retail sale and have a different audience. To set up a different market to do it has the potential to be quite an elegant solution.

He notes that it may take some time for issuers and investors to gain familiarity with the new market and to gain the confidence to use it, but adds: 'Once the new market gets some traction, I think you'll get a fairly clear demarcation between investment products that are truly retail-oriented, which will go on the main list, and the others. However, there may be some managers which, for all manner of reasons, still might go for a main listing anyway. There will still be a certain cachet in having a main listing in some quarters, especially among some of the more traditional UK investment managers.'

The initiative has been welcomed by lawyers active in the alternative funds area. 'Establishing a separate market for sophisticated structures such as single strategy hedge funds and feeder funds provides the sophisticated investors who want to access these strategies with the ability to do so through London's highly liquid markets, while ensuring clarity about the regulatory standards and potential risks that does not prevail on other markets currently open to UK investors,' says Steven Whittaker, a partner with Simmons & Simmons.

Nigel Farr, a partner with Herbert Smith, says: 'We believe this is a pragmatic step forward. It recognises that there will be managers proposing to launch private equity funds, hedge funds and funds of hedge funds who wish to access the highly liquid London markets but need the regulatory flexibility that the EU standards allow, and that there will be institutional and professional investors willing to invest on this basis.'