Slow Start

On 1 November 2007, the London Stock Exchange (LSE) launched the Specialist Fund Market (SFM), the only dedicated market for specialist funds and a specific investor group. It is targeted at closed-end funds such as hedge funds, private equity funds and emerging market and specialist property funds worldwide and seeks institutional, professional and highly knowledgeable investors. The initiative is largely believed to be a reaction to Euronext's popularity with fund listings since 2006. After a strong marketing campaign targeted at advisers, things have gone rather quiet. One year on only one fund is listed; Da Vinci Capital Management, based in Guernsey, which has been trading on SFM since 29 May 2008.

Sebastian Rice, partner at law firm Akin Gump Strauss Hauer Feld, which advised Da Vinci on the admission to trading, believes SFM's problems are down to market conditions. "Since the launch, I have seen a number of funds being interested in trading on SFM, but they are holding back," says Rice. Sean Page, corporate partner at Pinsent Masons who acted for Shore Capital, the placing agent for Da Vinci, agrees: "I know some fund managers interested in listing as well, but no-one wants to take the leap. Evidently, LSE has to date not been able to convince the fund management community of the advantages of an SFM listing."

LSE itself is not concerned with the lack of listings, claiming they did not expect an immediate rush of listings of these kinds of funds. "Depending on the fund, the process from making the decision to being admitted to trading could take up to a year. The current economic climate has made things more difficult than we originally expected as it is affecting the funds' decisions about the timing of floats. We might have to wait for a stabilisation in market conditions, but the SFM is addressing long-term needs," said Catherine Mattison, a spokesperson for the LSE. The current economic climate might also mean that funds are busy with managing their day-to-day business rather than looking for new routes such as a listing on SFM. Depending on its structure and the amount of paperwork it has to do internally, a fund should be able to gain admission to the SFM in well under a year. Da Vinci, for example, took about three or four months to list its CIS Private Sector Growth Fund.

When the market launched, people in the industry were under the impression that funds below the £100m mark would find the SFM suitable because of the relatively low costs involved. Rice believes there is not necessarily a 'best size'. "A fund would have to balance the costs and the administrative efforts against the benefits. The costs are substantially less than a full listing," he says.

But despite SFM fading in people's minds, having only one fund trading does not necessarily mean the market is flat. AIM-listed Marwyn Value Investors (MVI) is in the final stages of the admissions process and is confident that, in time, the market will be well used. According to Mark Watts, managing partner of Marwyn Investment Management, the lack of interest to date is a reflection of the entire closed-end funds market slowing down. "Ultimately, we do not see a relative lack of liquidity in a market as our principal concern. What matters is whether you can get investors interested in your fund," he says. "The importance of the individual investor matters more than the overall liquidity in smaller markets."

Indeed, Watts believes that the lack of buyers of the stock is the reason most listed closed-end funds currently face the problem of trading at large discounts (25-75% of NAV), rather than the oft-cited lack of transparency of the underlying portfolio. "There is a need for a specialised fund market that allows greater flexibility of fund structure. This has the potential to create a secondary market for listed closed-end funds, which in turn will reduce the significant discounts most of these funds trade at," Watts says. In essence this becomes a virtuous circle, with primary issuance for closed-end vehicles consequently becoming more attractive. "If you consider that there are a few hundred closed-end vehicles listed globally, but until now no dedicated marketplace, then the SFM has real potential for success," Watts adds.

The stock exchange has stated that several funds are in the process of applying. Page believes that "all it needs is one big name fund deciding to list and act as a crowd puller."

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