London's listed funds market is an expanding source of finance for privately-owned companies. New funds are raising money to deploy in high-growth innovative companies from early-stage to IPO including venture capital trusts (VCTs), where we have seen proliferation of strategies and ideas A listed trust can act as a is a permanent capital vehicle where entry and exit opportunities are embedded in the structure.
What does this mean in practice?
For investment funds investing in private businesses, the listed fund structure has several advantages compared to a typical unlisted private equity fund structure. Firstly, there are no limited time constraints on the life of the fund itself. Without term limitations on the fund, managers can back their investments - whether they are private or public companies - over the long-term. This enables funds to build bigger stakes even as the companies they support remain private for longer periods.
While the General Partner/Limited Partner (GP/LP) model can restrict the number of investors, the listed fund structure enables access to a broader investor base. The closed-ended structure means that shares in the fund can be traded regardless of the underlying illiquid nature of the private companies in which the fund invests.
How can they work towards growth?
This has never been an issue for listed closed ended funds. When they need more funds to expand, portfolio listed funds have been able to raise further capital quickly and scale flexibly, using several trusted and well understood mechanism which avoid dilution, such as C shares. Chrysalis Investments, which invests in late-stage private businesses, has been able to grow through further issuance, tapping into London's equity markets and building out its capability to invest. The company raised £100m at IPO in November 2018 and has returned to raise further capital every year since IPO and now has a market capitalisation close to £1bn.
Importantly, investee companies have the opportunity to benefit from a more ‘patient' type of capital, particularly during times of cyclical downturns. When Molten Ventures (formerly Draper Esprit) was admitted to AIM in 2016, the company was motivated by the ability to back its emerging companies for a longer period of time, with an added opportunity to build bigger stakes as companies remained private for longer periods.
This has been borne out by experience. Commenting on the firm's move from the AIM to the Main Market last year, Molten Ventures co-founder and director Stuart Chapman said: "What we knew then, and we can prove now, is that publicly listed venture capital is a powerful force for supporting entrepreneurs on their own long-term journeys to outsized success."
Is there a limit on how can they deploy their funds?
This is the market that offers a vibrant variety of sector exposure and limits are set only by how exciting the idea is. Funds such as Chrysalis and Molten Ventures invest across a range of fast-growing sectors, from AI and cloud services to deeptech and digital health. Some listed investment funds take a sector specialist approach. Augmentum Fintech was the first listed fund in London dedicated to fintech businesses; Seraphim Space Investment Trust focuses on early and growth stage space tech businesses.
There have also been specific schemes introduced by the UK Government, such as VCTs, which encourage capital deployment into smaller unquoted businesses to help them develop and grow, while benefitting from the input of professional investors.
VCTs, as a form of listed investment funds in London, have been a vital source of finance for private businesses through public markets. They have been a staple of the UK listed fund market since 1995.
Moreover, there has been growing investor support for VCTs - they have recently passed a significant milestone of raising more than £1bn in the 2021/2022 tax year; a 65% increase compared with the previous tax year. They have also created more than 27,000 jobs since 1995. There are now over 50 VCTs listed in London.
Listed investment funds demonstrate the force for good that public equity markets represent, supporting investment structures with the ability to enable dynamic, innovative firms to achieve their full potential, and deliver benefits to the economy as a whole.
This post is funded by London Stock Exchange