The Herbert Smith Freehills ("HSF") investment funds and asset management team has recently advised on nine equity capital markets fund raises (seven of which were as issuer's counsel), generating proceeds of c.£1.6 billion. Separately, the team also advised on the migration of two funds from the Specialist Fund Segment to the Premium Segment of the LSE's Main Market.
Nigel Farr, the head of HSF's investment funds and asset management practice, believes that the increased activity witnessed in 2017 in the London listed funds space demonstrates the appetite in the market for novel and attractive investment propositions from managers with strong track records (whether these are in the London listed market or elsewhere).
He made the following key observations based on the various transactions HSF has acted on in 2017:
1. The London listed closed-ended fund structure is attractive to US managers
The regulatory regime surrounding publicly traded US investment companies is such that US managers welcome the flexibility afforded by the London listed funds market. This, combined with the access to a new investor base and the benefits of a flagship UK-listed fund, makes the London listed fund an attractive proposition for US managers. The IPOs of BioPharma Credit PLC ("BPC") and Sherborne Investors (Guernsey) C Limited ("SIGC") were two of the largest listed fund IPOs witnessed in recent years, evidencing interest in the London listed funds market from US managers with strong track records and interesting investment propositions.
BPC's IPO raised US$760 million for a newly formed UK investment trust which will lend to companies in the life sciences industry, providing exposure to royalty payments generated on sales of pharmaceutical and biopharmaceutical products. BPC is managed by Pharmakon Advisors, a US based investment adviser that currently manages commitments of c.US$1.3 billion in four private funds with similar investment strategies.
SIGC, managed by Sherborne Investors, raised £700 million through its IPO with a view to realising capital growth from investment in a publicly quoted company (which could be in the UK or elsewhere) and which Sherborne Investors considers to be undervalued as a result of operational deficiencies that it believes can be rectified by its active involvement.
Gabelli Merger Plus+ Trust PLC ("GMP"), a UK investment trust, also raised more than US$100 million through its IPO to invest in merger arbitrage strategies. GMP is managed by Gabelli Funds, LLC, a New York based investment adviser with combined aggregate assets under management of c.US$23.2 billion.
2. The continuing popularity of alternative strategies
The BPC IPO and the restructuring on Polar Capital Global Healthcare ("PCGH") demonstrated the existing investor interest in the healthcare sector. Similarly, real estate credit continues to be an attractive sector for investors.
However, the fund raises this year also evidence investor interest in novel alternative strategies, which may be attributed to the undiminished investor appetite for uncorrelated income-generating products, combined with the attractiveness of the London listed fund structure for managers with alternative investment strategies.
Amedeo Air Four Plus Limited ("AA4") is a Guernsey-domiciled investment company which seeks income and capital returns by acquiring, leasing and then selling aircraft. HSF advised AA4 on its initial public offering in May 2015 and has advised on a number of subsequent placings since then as part of its programme of aircraft acquisitions, most recently its secondary fundraise of c.£140 million in June 2017.
Hipgnosis Songs Fund Limited ("Hipgnosis") is another Guernsey-domiciled investment company proposing to invest in music royalties, a previously unexplored investment opportunity for the listed fund sector. Hipgnosis published its prospectus on 23 June 2017, and the fund raise is scheduled to complete in mid-September.
Investor interest in income-generating products was also evidenced by the zero-dividend preference share offerings implemented by funds such as NB Private Equity Partners Limited ("NBPE") (in 2016) and PCGH (in 2017).
3. Novel voting structures and share rights
One of the attractions of the London listing regime is its flexibility. In 2017, the London listed funds space witnessed the introduction of some novel voting structures and share rights.
In May 2017, NBPE, a Guernsey-domiciled investment company, migrated its admission to trading from the Specialist Fund Segment to the Premium Segment of the LSE's Main Market. This migration required certain alterations to NBPE's voting structure in order to comply with the eligibility requirements for the Premium Segment whilst also maintaining its status as a foreign private issuer for US regulatory purposes.
Separately, GMP has also implemented a loyalty programme to incentivise long-term ownership of its shares. The programme operates by offering each long-term shareholder the ability to acquire additional voting rights.
Nigel Farr commented:
"The fact that c.£1.6 billion has been raised in rather uncertain market conditions demonstrates continuing investor appetite for London listed fund products. HSF's instructions on transactions such as these demonstrate the depth, experience and expertise of our top ranked funds practice, with a particular ability to advise on the more complex, exciting transactions and assist our clients in listing bespoke and innovative structures."
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