LSE courts alternatives

The London Stock Exchange plans to open the Specialist Fund Market for listings by November of this year to better compete with Euronext for hosting alternative asset vehicles. The new market will be less regulated than other areas of the LSE, and bests Amsterdam by removing the minimum capital requirements or the requirements for a certain proportion of shares to be held in the public hands. The market arrives just as the Financial Services Authority hones its regulatory framework, which includes raising minimum requirements for listing entities.

The LSE intends for the new market to host entities seeking institutional, professional or highly knowledgeable investors, such as single strategy funds, feeder funds, specialist sector funds, limited partnership structures, specialist geographical funds and funds with specialist governance structures. Issuers remain free to seek a wider range of investors through the Main Market, though not without bearing the regulatory brunt that comes with acting as a fully fledged public vehicle in the UK. Tapping that Main Market might be all the more difficult going forward in lieu of the FSA ending a separate, lighter regime for non-UK funds.

The new market will be less regulated than other areas of the LSE, and bests amsterdam by removing the minimum capital requirements or the requirements for a certain proportion of shares to be held in the public hands.

Prior to launching the Specialist Fund Market, there were only three ways for investment funds to seek a listing in London: to apply for a primary listing on the Official List and to trade on the Main Market under Chapter 15 of listing rules crafted by the UK Listing Authority, seek a listing on the AIM, or seek a ?secondary listing? on the Official List and trading on the Main Market under Chapter 14 rules.

Many investment funds are hesitant to list under Chapter 15, with its requirement of an adequate spread of risk, three years' audited accounts and directors and managers able to ?demonstrate sufficient and satisfactory experience? according to a recent client update from global law firm Debevoise & Plimpton. The Alternative Investment Market may forego these requirements, but as it's tailored for small but fast growing companies, a listing on the AIM can be considered too small for permanent capital structures.

Applying for a ?secondary listing? under Chapter 14 was a relatively recent option for non-UK investment funds that featured a ?minimum directive? regime, involving only the mandatory aspects required under EU directives. Chapter 14 was originally meant exclusively for overseas funds that were already publicly listed elsewhere looking to expand their presence, but by July 2005, funds could apply for a secondary listing without a prior listing elsewhere. By March of the following year, the FSA resolved to abolish such secondary listings due to potential risks for retail investors, but while the initiative was eventually shelved, Chapter 14's regulatory relief appears not long for the books.

The FSA is now proposing a unitary regime that would alleviate the ?minimum directive? regulatory option, though funds currently listed under that regime are not required to comply with the new rules. However, the new Specialist Fund Market may well fill the void for those looking for a lighter regulatory burden while listing in the UK.

Any securities listed on the new market will need no approval for public notification on the Official List, so the market will be considered an unlisted one. This market will apply the minimum standard imposed by European directives. This means that listed funds will be subject to a low ongoing disclosure burden and will not need an independent board. Such funds will also be able to sell non-voting shares. Applicants for listings on this market will need to produce a prospectus approved by their competent authority, which will likely include a comprehensive list of risk factors. The LSE stresses the specialist market isn't for retail investors, though as a note from pan?European law firm SJ Berwin notes, ?as a result of the publication of a prospectus, the regulatory framework in the UK may, in some cases, not be able to prevent this.?

Whether the Specialist Fund Market will siphon off listings that would have otherwise landed on Euronext remains to be seen, though many observers expect that investment vehicles already aiming to list in the UK will tap the new market as Chapter 14's light touch grows heavier. The true test will be when the next megafund of KKR's caliber goes looking to list and chooses the Specialist Fund Market over other exchanges.