By Lisa Priestley, Fund Director
In late April, the London Stock Exchange (LSE) hosted its latest Investment Fund Conference – sponsored by Link Group and attended by members across the investment community, including asset managers, advisers and other market enablers.
Our own Lisa Priestley was an expert panellist at the hybrid event to discuss the landscape of listed funds. She was joined by other specialists from KPMG, Travers Smith, Stifel and InfraRed Capital Partners.
Lisa is a fund director in our investment trust team with over 20 years of experience in fund accounting and administration services to investment funds. Her expertise helps Link Group to support more than half of the UK’s real estate investment trusts and over 40% of UK-listed companies.
The panel was asked a series of questions to discuss all things topical in the landscape of listed funds, including:
- What are the main themes you’re seeing the listed funds space?
- What effect is rising inflation having on infrastructure and renewables?
- What should new managers consider when launching a fund?
- What is driving the influx of capital into sustainability and green funds?
- What changes are you seeing in shareholder engagement?
Celebrating 2021 as a record year for UK capital raising
Before Lisa’s panel, the LSE celebrated 2021 as a record year for UK capital raising.
The IPO market was the busiest it’s been since 2017, introducing multiple new segments such as digital infrastructure, clean hydrogen, space technology and real estate that focuses on UK life sciences.
The investment funds market saw an excellent year, with innovation giving investors greater access to new asset classes:
- Closed-ended funds raised a total capital of £16.6bn, with £4.1bn at IPO
- 24% of all further capital in London was raised by closed-ended funds
- Listed green closed-ended funds raised a total capital of £3.9bn
- 7 out of 15 fund IPOs were by green funds
- Alternative funds have outperformed the FTSE All Share by 21% over the last five years.
- The average daily value of liquidity traded is at nearly £400m (5x more than New York)
- There’s been a 180% increase in retail broker member volume and 151% increase in value traded by retail brokers over the past five years
The landscape of listed funds in 2021
Lisa’s panel explored all things topical in the landscape of listed funds, from climate change and rising inflation rates to ESG reporting, launching a fund and shareholder engagement.
The panel first reflected on 2021, which saw a record year of issuance and resurgence since the impact of the pandemic. Over £16bn of capital was raised last year, almost double the total in 2020, compared with the last record of £14.2bn in 2007.
2021 was dominated by secondary issuances who accounted for 75% of the capital raised. This is because investors have backed what they already knew, however there were still 15 IPOs last year.
74% of the capital raised by listed funds went into alternative fund strategies. This focus on alternative assets was also seen in the unlisted space, where private investment companies investing in alternatives saw substantial inflows.
Looking forward to 2022 and beyond
The panel covered multiple themes as they looked to the future for listed funds.
Climate change continues to be a key conversation, of which London remains at the centre. The panel described funds that are emerging to generate power from renewable energy sources, as well as energy-efficient funds during a time of high energy prices.
Many investors in the London-listed funds sector are looking for carbon reduction and avoidance. The panel predicted that we will see increasing focus on carbon removal from the atmosphere as more segments such as forestry funds are introduced to the market.
Rising inflation rates across infrastructure and renewables
Social and ecological themes are affecting infrastructure, renewables and real assets, including the economic impact of inflation.
The panel described the ways this can manifest. For example, it affects the direct linking of underlying assets – such as contractual or established revenue mechanisms – and indirectly relates renewables to energy price. The implications can also be seen across space assets which are outperforming in Q1 2022.
What should new managers consider when launching a fund?
The panel agreed that strategic planning and sound advice are amongst the most important steps of launching a fund.
For an IPO to succeed, the manager needs to understand and articulate exactly what value the fund’s strategy will add for investors when listed. Activities such as test marketing give managers time to iron out their strategy and tweak accordingly to best suit investor needs.
There are also multiple stakeholders to consider – such as accountants and lawyers – so preparation at the right time is key. Managers should work closely with third parties who are experienced in launching investment funds.
The IPO process in the UK is more flexible when compared with the US or Asia, as managers can communicate with investors in the early stages. This opportunity should be utilised as processes can often take longer depending on aspects such as due diligence, so planning ensures efficiency and effective communication with investors.
The shape of IPOs also has more flexibility in the UK that can be used to the manager’s advantage. The variable structure enables managers to successfully move existing funds into the listed space as they mature.
Influx of capital into sustainability and green funds
ESG (environmental, social and governance) is not a nice-to-have anymore. It’s becoming more and more crucial with increased scrutiny from both regulators and investors.
As the terminology around ESG grows, the panel agreed that it’s important to drill down and clarify requirements for funds. For example, there are currently no fund-level disclosure requirements as they are all at the manager level. One of these is the Sustainable Finance Disclosure Regulation (SFDR) which is only in phase 1.
Listed funds are in fact exempt from this, but must follow identical rules set by the Financial Conduct Authority (FCA) if they have over £50bn of assets under management (AUM). From next year, this will be required for listed funds with over £5bn of AUM.
Many listed funds that aren’t required to follow these requirements are voluntarily doing so to prepare for regulatory change and adopt best practice. This is largely driven by investors in listed funds who want to understand their approach to ESG.
The last two years have seen many tangible changes in shareholder engagement, especially due to government restrictions imposed during the pandemic.
In 2020, annual general meetings (AGMs) were forced to take place behind closed doors with almost no shareholder interaction. Since then, the panel has seen a major increase in hybrid events where shareholders can attend either in-person or virtually.
This often involves the use of audiocast and webcast to deliver a live function for shareholders – including live questions and even questions submitted ahead of the AGM. Hybrid interactivity has enabled AGM tools to reach a greater audience that might not have been involved in the meeting before.
Diversity and inclusion continue to be important themes for shareholder engagement, with the FCA publishing rules that increase requirements from boards even more in 2023 and 2024. This drive is also being supported by government agencies who are influencing shareholders to hold boards accountable.
Key takeaways from the panel discussion
- 2021 was a record-breaking year for UK capital raising including £16bn+ for closed-ended funds
- 74% of the capital raised by listed funds went into alternative fund strategies
- Investors in the London-listed funds sector are looking for carbon reduction and avoidance, and will look towards carbon removal from the atmosphere
- Social and ecological themes are affecting infrastructure, renewables and real assets, such as the economic impact of inflation
- Strategic planning and sound advice are amongst the most important steps of launching a fund
- Many listed funds are following ESG requirements with a drive from investors
- For many funds, the traditional AGM structure has transitioned to hybrid – reaching and engaging more shareholders
- Diversity and inclusion continue to be important themes for shareholder engagement with added pressure from government agencies
We will soon launch our Link Group Investment Trust Dividend Monitor where you can find the full picture on payment trends and the outlook for dividends across the investment trust landscape.