Public markets have been shrinking for several years, in part because fewer businesses are willing to face the setbacks that can occur when they list shares. This can include greater scrutiny and a higher regulatory burden.
Despite certain stock markets dwindling, the total number of corporate entities in existence has not fallen back in the UK. Companies House figures show that in the UK alone the number of companies has grown substantially. Around 4m businesses were on its register at the end of 2017, compared with 3.4m in 2014.
The behaviour of professional investors also reflects this shift in dynamics: asset managers are increasingly focusing on private markets (see Box 1).
Enter, the industry
Proposals already put forward by the FCA could still have an effect on how investment managers treat illiquid assets. As part of the consultation, which stems from the property fund gating fiasco of 2016, the regulator has proposed a new rule forcing relevant funds to suspend dealing if a specialist expresses uncertainty about the valuation of ‘immovables’ accounting for at least 20 per cent of assets.
The FCA’s proposals, which principally relate to non-Ucits retail funds such as property portfolios and are summarised in Box 2, also include the idea of preventing funds that invest in illiquid assets from holding large amounts of cash. This suggestion, which flies in the face of current practices in the sector, is intended to stop certain investors from having a “first-mover advantage”; a fund under stress would instead swiftly suspend dealing for all holders.
The regulator is not alone in attempting to better address the liquidity mismatch that can occur when funds buy illiquid assets but offer daily dealing.
Asset management trade body the Investment Association used a recent paper on its outlook for the next five years to introduce the concept of an open-ended “long-term asset fund”. While the exact details are under wraps until later this year, the IA said such a product would be able to move away from daily dealing.
“This new type of fund would have the ability to invest in less liquid or illiquid asset classes, and importantly to move away from daily dealing in units to reflect the nature of the investment strategy,” the body explained.
“The fund would be open-ended, able to receive new money to invest and for investors to redeem at appropriate time intervals, and would coexist with alternative forms of funds – notably closed-ended funds.”
Tough crowd
Would these suggestions work? While commentators have been quick to demand responses to the Woodford crisis, the latest ideas have met with opposition from within the industry.
