Why should a fund be listed on a stock market?

“Usually this is something that is very much driven by the investors of the fund,” Noémi Gémesi, partner and head of the capital markets team at Loyens & Loeff in Luxembourg, said in an interview. She suggested that fund promoters are generally not coming up with “this idea”; instead, it’s rather dependent on investors’ needs. Regulatory requirements are “usually” the primary reasons and added that tax incentives in certain countries, such as Germany and the UK, could also be a reason why a promoter will elect to do a listing. She also thinks that the underlying reasons “vary a lot based [on] the type of structure, the investor base and geography.”

Gémesi added that closed-ended funds without possibilities to redeem units are typically a candidate for listing, to ensure some liquidity for the unit or shareholders through active market trading. She noted that a fund listing is required in certain jurisdictions, such as Sweden, so that promoters can sell their funds to retail investors.

Paperjam also noted that some pension funds are restricted when investing into other funds unless the funds are listed on an exchange.

Do you think that the listing of funds will gain more prominence going forward?

“It’s really the talk of the town now at the moment,” said Gémesi. She thinks that certain market movements such as the democratisation of alternative funds towards retail investors encourage such a development. Yet it is not a smooth journey and there have been some bumps on the road, as experienced with Nordic investors that backed out of a second deal that Loyens & Loeff was working on.

“We get more and more questions. So even if it doesn’t always go through, there’s much more interest,” claimed Gémesi. She is optimistic that there is room for growth, given that only 15% of promoters have listed funds, according to the law firm CMS, a competitor of Loyens & Loeff.

Do listed funds generally start their life as listed, or are they listed later in their life?

As far as Loyens & Loeff is concerned, listings are usually planned from the outset, according to Gémesi. Yet she reiterated that investor demand may pressure promoters to change tack at a later stage, if a fund is not immediately listed at launch.

Gémesi noted that it is a “common trait” for promoters to structure umbrella funds with listed and non-listed share classes even in various currencies to accommodate various investor needs.

The Luxembourg Stock Exchange (LuxSE) claims that it can list any fund in one of its two markets: the Bourse de Luxembourg (a regulated market within the meaning of the EU’s Mifid II rules) and the Euro MTF market (a multilateral trading facility within the meaning of Mifid II).

Are listings always the preferred solution?

Gémesi thinks that the lack of demand from investors will probably deter promoters from listing their funds. Despite more limited obligations than those for an operating company, fund promoters must nevertheless be mindful of documentation approvals for a listing, publication obligations, costly ongoing disclosure and reporting obligations.

Therefore, promoters need to perform a cost-benefit analysis to assess whether a listing will make the fund more appealing as it also depends on the type of structure.

It is worth noting that a promoter may not be ready to share public information, such as its strategy, with competitors or other stakeholders. Gémesi observed that there is often “resistance” to having the prospectus widely available.

LuxSE claims to be the world’s most successful fund listing venue. Do you share this view?

“I have to share this view, I’m afraid,” laughed Gémesi. As a Luxembourg capital market lawyer, she admitted to working exclusively with the LuxSE. She thinks it makes sense to concentrate on the local venue, given that Luxembourg is the “second most important fund market” in the world after the US.

Despite Loyens & Loeff having offices in the Netherlands, Belgium and Switzerland, she would stick with Luxembourg for the listing of funds. She thinks that the local exchange is “very commercial,” and the firm knows the fund industry and structures “very well.” Gémesi added that the LuxSE is “very flexible, accommodating, fast” and proposes “competitive fee structures.

”She continued by saying the bourse “is very good for having visibility and complying with various regulatory requirements.” Yet not all is rosy with the LuxSE. Gémesi considers that liquidity is a weakness for both of its markets: the EU-regulated Bourse de Luxembourg and the exchange-regulated Euro MTF.

Gémesi thinks that the LuxSE is very much aware of the issue and is working at finding ways to solve the problem. “If liquidity is the only reason why you want to list, then perhaps there could be better venues,” she argued.

Questioned about a better venue if liquidity were an issue for her clients, she would opt for the US. Indeed, she explained that she read an article in the Financial Times in 2021 comparing the volume between the New York Stock Exchange, the London Stock Exchange and the Frankfurt Stock Exchange. “I was shocked to the extent of [how] even London is just like a fragment, a tiny fragment of the volumes that [trades] in New York.”

She acknowledged that Amsterdam had taken some market share in stock market volume over London since Brexit, but she reiterated: “If you want real liquidity, [NYSE] is the place where you want to be.”

A focus on listed alternative investment funds

As Luxembourg has specialised more in alternative investment funds in the last several years, so is Loyens & Loeff, as opposed to retail mutual funds. “Our firm does not do Ucits funds.” Not based on hard data, Gémesi thinks that the prominent underlying assets in listed funds are in the real estate and private equity sectors.

She noted an increased interest coming from their clients in the last 12 to 18 months to list their funds set up pursuant to Part II of the Luxembourg law of 17 December 2010, as amended, a development that she associated with the democratisation trend ongoing in Europe. More specifically, she explained that Loyens & Loeff has been involved in few cases. However, only one fund has been listed.

As an example, Gémesi noted that a “Luxembourg fund that targets Swedish retail investors” is trading on the regulated Bourse de Luxembourg to comply with Swedish regulatory requirements. However, she observed that promoters prefer the Euro MTF market of the LuxSE, as they expressed the wish to avoid the stringent requirements of regulated markets. She stressed that the selection of the LuxSE market will largely depend on the reasons for the listing, including specific requirements of the targeted investors.

Gémesi pointed out that a large, non-disclosed North American asset manager has also expressed its intention to list alternative funds. In addition, she expects German promoters to list their funds in Luxembourg. She noted that contrary to bond listings where Luxembourg and Vienna are important venues, promoters are very much focused on Luxembourg for fund listing.

She also noted that funds can access retail investors with a Part II fund listed on a regulated market (without being an Eltif) as an alternative to an Eltif.

Has the professional segment of the LuxSE for qualified investors provided regulatory proof for promoters?

“In my recent practice, I haven’t seen much traction for this segment, so we always propose it, but… I don’t see specific excitement about this segment,” noted Gémesi. “The professional segment is a perfect option for Sifs or Raifs… [but] the circle of the eligible investors is limited by fund legislation.”

This article first appeared in the Paperjam’s Alternatives and Fund Ecosystem 2024 supplement. Noémi Gémesi will moderate the “Charting new horizons: the LuxSE listing advantage” panel, taking place today, at the Alfi Private Assets Conference in Luxembourg.