Given high-profile developments relating to Mifid II, Priips and AIFMD in 2015, one could be forgiven for having missed some important, but less far-reaching, regulatory developments.
The UK Listing Authority (UKLA), the Aim team and the London Stock Exchange all published new rules and guidance specifically relating to investment companies.
New UKLA guidance considers investment companies’ eligibility for premium listing and focuses on the need to spread investment risk and the prohibition from conducting significant trading activity. The UKLA is keen to ensure investment companies are not simply holding companies of commercial groups that should more properly be subject to other parts of the listing rules.
The need to spread risk leads to the requirement for an investment policy that provides information on asset allocation, risk diversification and gearing. The UKLA considers investment policies carefully, and will engage with the applicant’s sponsor where it considers that risk diversification may not be achieved.
In assessing whether an applicant should be regarded as a trading company or an investment company, the UKLA will consider a number of factors. Of particular interest is the UKLA’s attitude to financing arrangements.
Secured debt at issuer level or covering multiple assets may compromise the spread of risk. An exception is made for secured pools in real-estate funds.
In its original consultation, the UKLA suggested that overdrafts were more suggestive of a commercial company than an investment company.
Following consultation responses, however, it acknowledged that overdrafts have a role in the financing of investment companies, but would wish to engage with the fund’s sponsor to fully understand the arrangements.
|The specialist fund market – Catering for niche players|
The Specialist Fund Market (SFM) is the London Stock Exchange’s dedicated market for specialist closed-ended investment funds targeting institutional, professional and knowledgeable investors.
In a factsheet on the SFM, the LSE notes: “By working with market participants, the Specialist Fund Market has been designed to suit a range of highly specialised funds, including: private equity funds; feeder funds; hedge funds, both single- and multi-strategy; specialist geographical funds; funds with sophisticated structures or security types; specialist property funds; infrastructure funds; sovereign wealth funds and single strategy funds.”
Many readers will be aware of infrastructure and renewables funds coming to market with a ‘pipeline agreement’ in place that enables them to source investments from the investment manager’s group without those acquisitions being classified under the related party rules.
Draft UKLA guidance now suggests that in future this will only be permitted where the fund can point to “structural characteristics” in the sector it invests in that mean the fund can only provide investors with exposure by buying from the party in question.
Even where a pipeline agreement is the only viable option, the fund must demonstrate it is able to effectively process such purchases and manage any conflicts of interest that may arise.
The UKLA has highlighted a concern regarding investment management agreements that contain unusually onerous provisions on the fund, such as provisions for continuation in perpetuity or an exceptionally long period of time, termination costs that are essentially prohibitive, or termination only with shareholder approval.