LP Corner: Listed fund-of-funds

An investor not pre-disposed to investing large chunks of money into a fund and having no control over it, yet still wanting to get a piece of the private equity pie, is going to find the listed FoF the perfect route to take. For the listed FoF gives investors liquidity and control. They are, compared to unlisted FoFs, easy to get in and out of as an investor. While there are obvious restrictions, if as an investor you don’t like how things are going, or you simply want to reshuffle your asset allocation, you can sell your shares and move on. There are a number of investors whose remit demands they have a certain degree of liquidity in their equity assets. Listed FoFs allow them to do this.

A relative veteran of the listed FoF arena is F&C Private Equity Trust. The fund targets mid-market buyout funds, mainly in Europe, and it tries to have a range of different investment styles within its portfolio to ensure diversification. More than half of the fund is invested in buyouts with a significant amount in mezzanine and some in venture capital. Up to one-third of the fund is allowed to be co-invested in deals alongside funds the trust is investing in.

F&C Private Equity Trust is the result of the merger between F&C’s Discovery Trust and Martin Currie’s Capital Return Trust, when F&C bought the Scottish private equity fund manager last year along with its three-strong team, led by Hamish Mair. The trust controls assets of over £90m, with Friends Provident a cornerstone investor in the trust, spending £20m for new shares back in June.

Mair says one of the benefits of a listed FoF for investors is its evergreen nature. “Listed FoFs tend to give quite good vintage diversification, as opposed to non-listed vehicles where investors have just one vintage. It gives the investor an extra diversification, and this is what a FoF is all about.”

Being a public company, the shares are open to anybody. Not just the preserve of institutional investors, listed vehicles can be an attractive proposition for a range of investors, from asset managers of private portfolios, to high net worth individuals, to the man on the street. They provide accessibility to a whole host of investors. Thirty per cent of those in SVG Capital are high net worth consultants and individuals. “The appeal for them is they can get exposure to private equity and can check the value of their stock because it’s valued every morning,” says Alice Todhunter, head of investor relations at the firm. “To get into the latest Permira fund, you need €15m. We allow investors access to the asset class without the need to part with such large sums of money,” agrees Nick Ferguson, chairman of SVG Capital.

SVG has been in the listed FoFs game since 1996. Seventy-five per cent of its investment, soon to be 80%, goes to Permira funds – it recently announced a €2.8bn commitment to Permira IV, which is targeting €8.5bn – with the remainder going to a range of other funds in the SVG family, including SVG Diamond, a collaterised fund obligation (CFO) of private equity funds vehicle which closed its second CFO on €500m in February.

The raison d’etre of SVG Capital, like all listed FoFs, is to offer accessibility and liquidity to those investors who would usually find themselves effectively barred from the asset class, as well as those larger institutions who don’t want the hassle of carrying out masses of due diligence on a host of funds. Todhunter says: “Both small and large institutions use us it as a proxy to private exposure.”

This is something Andrew Lebus, managing partner at Pantheon, also emphasises. “To embark on a strategic FoF programme you need a critical mass. A listed FoF means you can get straight in there and buy straight into the market and satisfy your allocation requirements much quicker.”

Pantheon International Participations (PIP) is the granddaddy of listed FoFs, starting life in 1987. Unlike most of the other vehicles out there, it has a global programme and is not asset class specific: it invests in the whole private equity gamut, from Asian venture capital to US buyouts, to secondary investment. It was set up to tap into small institutional and retail markets, which it still does, but there is also a larger presence from those institutions that use the fund to infill their own programme. For Lebus, a listed FoF is “the holy grail. It provides liquid access to an illiquid asset class.”

Few and far between

But if they are such a great idea, why aren’t there more of them? One reason is the regulation and paperwork that comes with being a listed company. The extra burden is enough to put some fund managers off launching their own one, especially if, as many do, they already manage an unlisted one or several.

There is also the fact that they are potentially vulnerable to a hostile takeover. If the net asset value (NAV) is low, or the fund was underperforming, a manager of a listed FoF could be exposed to a vulture fund and removed.

A bigger factor is that there just aren’t that many FoFs out there. Even though today they are a mainstay of the private equity landscape, they are still quite recent, and many of them are based in the US, which is itself another reason for their low number. HarbourVest and its ilk are unable to offer private equity to the public markets due to government legislation – although SVG’s Ferguson thinks this situation will change (think of KKR’s US$1.5bn listed buyout fund on Euronext Amsterdam as a testing the water exercise). Automatically this discounts a large chunk of the FoF players. In the UK there are only a handful (there are even fewer European ones): those already mentioned (F&C Private Equity Trust, SVG Capital, PIP) and the likes of the Graphite Enterprise Trust and the Electra Investment Trust, both of which started out as direct investment funds.

And herein lies the rub. Investing in a new listed FoF is not an attractive proposition for investors. Richard Sachar, chief executive of Almeida Capital, says: “The main reason there aren’t more of them is that the market is discounted to cash, which means if you set-up a cash vehicle, you get a discount on the NAV of the stock from day one, so for investors it makes more sense to buy into an existing fund”, ie those funds with assets already, like Graphite and Electra.

The fact that only one firm has bothered to start a listed FoF is evidence of the difficulty of getting such a vehicle off the ground. Bear Stearns is the most recent entrant to the market, launching Bear Stearns Asset Management in 2005 in London. It is focused on the US and Europe and in funds with a so-called late primary option, and, crucially, it listed with a significant secondary component. It plans to raise around £75m each year and was touted at the time as being the first hybrid private equity and hedge FoF, structured as a split capital trust. It also completed a US$300m securitisation of 40 private equity interests.


The feeling in the market is that there is room for more listed private equity products, and that more will be coming along soon. Indeed, rumour has it that two institutions in the City are looking at floating a private equity vehicle, either a direct fund or a FoF. KKR’s imminent listed fund has already got tongues wagging, and the growing use of Special Purpose Acquisition Companies (SPACs, see EVCJ, November 2005) implies there is an appetite out there.

And this appetite could well be sated in the coming months. In March, the UK’s Financial Services Authority (FSA) published a consultation document on proposed changes to rules on listed investment entities. As things stand there are five separate regimes for funds listing on London’s main market. The FSA wants to replace these with a single system, covering everything from VCTs to Real Estate Investment Trusts (REITs).

There are two important changes the FSA wants to introduce. The first is the abolishment of the rule that no more than 20% of a fund can be invested in a single deal. The existence of this rule is to protect investors, but the FSA believes that the fund managers should be free to determine how their investment risk is spread and proposes instead that each listed fund produces a public statement detailing how it will achieve a spread of risk, along with an annual report to investors on how it is achieving this strategy.

The second key proposal is the removal of the requirement that a listed fund has to be a ‘passive’ investor – ie they are not allowed to take controlling stakes in the companies in which they invest.

However, the suggested replacement, that funds “may provide strategic advice and may have representatives on the boards of companies in which it invests, provided it does not take board control or become actively involved in the day-to-day management of those businesses” means it’s only a limited improvement.

Despite this, it’s unlikely there will be a big flood of listed private equity products, even if KKR’s venture is a success (it’s certainly not the first; 3i has been listed for years, US firm Ripplewood floated a vehicle on Euronext in April last year, and there are still some US BDCs floating about). The time, hassle and risk of setting one up will dissuade many, a lack of desire or resources will put off the rest. But there is a stirring in the air that private equity should and will increasingly tap the public markets for money.