Launching a new investment trust on the London Stock Exchange (LSE) involves meticulous planning, strategic execution, and a strong team of advisors to help ensure that a successful launch is achieved.
Investment trusts are a platform for diverse fund strategies to access deep pools of capital from institutional and retail investors. They are also attractive to investors as they provide opportunities for investment into funds in traditional sectors, such as equities, and in alternative asset classes, including royalties, renewable infrastructure, property, and private equity. This article provides an overview of the essential steps to prepare and launch an investment trust Initial Public Offering (IPO) on the LSE.
Understanding Investment Trusts
Investment trusts are closed-ended funds that pool money from investors to invest in a diversified portfolio of assets. They are listed on a stock exchange, allowing shareholders to buy and sell shares in the trust. The closed-ended nature means the fund has a fixed number of shares, preventing dilution of existing shareholders’ investments.
Why IPO on the London Stock Exchange?
The London Stock Exchange is Europe’s largest exchange for closed-ended funds serving a diverse and innovative sector for over 150 years. There are over 390 listed investment funds on the London Stock Exchange with over $320bn+ in assets under management investing in more than 70 subsectors, providing access to a range of asset classes and geographies. The London Stock Exchange has a clear pedigree and well-established tradition for this dynamic investment company structure.
The Financial Conduction Authority (FCA) has recently amended the Listing Rules with effect from 29 July 2024 with the aim to “boost growth and innovation and ensure the UK listing system is more aligned with those in other markets.” The new rules will make it simpler and more streamlined to list. The changes mark the biggest change to the listing regime in over three decades.
With minimal IPO activity in London for the past two years, with an IPO pipeline of companies that postponed listing during this period, this rule change is cause for optimism. In addition, with the victory for the Labour Party in the UK elections, capital markets sources are broadly positive, hoping for a Labour led revitalisation of the UK IPO market.
Steps to Launch an Investment Trust IPO
1. Define the Investment Strategy
The foundation of any successful investment trust is a clear and compelling investment strategy. Decisions to be made include:
- Investment Objective: Clearly outline the trust’s goals, such as capital growth, income generation, or a combination of both.
- Target Assets: Decide on the asset classes the trust will invest in, such as equities, bonds, real estate, or alternative investments.
- Geographic Focus: Determine if the trust will focus on a particular region or have a global investment strategy.
- Sector Focus: Specify any sectors the trust will target.
A well-defined strategy will help attract investors seeking exposure to the specific assets or sectors your trust focuses on.
2. Partner with key advisors
The IPO journey will take time and will present challenges along the way. Identifying and selecting an experienced group of key advisors will not only make sure that the journey to launch is as smooth as possible but will also ensure that any new investment trust has the best chance of a successful launch. The initial group of advisors should include:
- Sponsor and Broker: Assess the investment trust’s eligibility for listing, provides capital raising advice, supports and executes the IPO, provides strategic corporate finance advice and corporate broking.
- Legal Advisors: Advises on the myriad laws and regulations that need to be adhered to during an IPO and will prepare the key constitution documents, including the Prospectus, to support the investment trust.
- Company Secretary: Establishes the corporate governance framework that defines how the investment trust will be operated and managed in line with corporate governance best practice, including preparing key policies and procedures documents like the Financial Position and Prospectus Procedures (FPPP) memorandum.
Your list of advisors will grow to include several key advisors the closer you get to launch and as preparations are made to support the investment trust post-IPO. These advisors may include administrators, custodians, depositaries, alternative investment fund managers (AIFMs), auditors, reporting accountants, public relations agents, and registrars.
3. Conduct test marketing
Before committing to an IPO, it is essential to gauge market interest and refine your offering based on feedback. Test marketing typically includes several rounds of investor meetings the investment trust’s strategy is presented to prospective investors, feedback is received and appetite for the investment strategy is gauged.
Test marketing helps in validating demand and making necessary adjustments to enhance the trust’s appeal. This marketing may take some time and will also consider when the market may be receptive to a new investment trust IPO. It is important to do this early enough to make sure that you have time to prepare the investment trust so that it is ready to IPO when the market is open.
4. Establish a Governance Framework
A robust corporate governance framework is crucial for the credibility and long-term success of the investment trust. Key elements include:
- Board of Directors: Appoint a diverse and experienced board with expertise in finance, compliance, and the specific sectors your trust will target. Independent directors can enhance accountability and investor confidence.
- Policies and Procedures: Establish comprehensive policies and procedures for risk management, compliance, and ethical conduct.
- Transparency and Reporting: Commit to high standards of transparency and regular, detailed reporting to shareholders and regulators.
Strong corporate governance ensures the trust operates responsibly and aligns with shareholders’ and wider stakeholder interests.
5. Develop a Comprehensive Prospectus
The prospectus is a key document that provides potential investors with detailed information about the investment trust. It should include:
- Investment Strategy and Objectives: A clear explanation of the trust’s investment aims and strategies.
- Risks: A thorough disclosure of the risks involved.
- Financial Projections: Forecasts for financial performance, although these must be realistic and not misleading.
- Management and Fees: Details about the management team and the fees associated with the trust.
The prospectus must comply with regulatory requirements set by the Financial Conduct Authority (FCA) and the LSE.
6. Obtain Regulatory Approval
Launching an investment trust IPO requires compliance with regulatory requirements. Steps include:
- FCA Approval: Submit the prospectus and other required documents to the FCA for approval.
- LSE Listing: Ensure the trust meets the LSE’s listing requirements, including governance standards and financial disclosure obligations.
Working with legal advisors who specialize in financial regulations can facilitate a smoother approval process.
7. Marketing and Investor Engagement
A successful IPO requires robust marketing to generate interest among potential investors. Activities include:
- Roadshows: Organize presentations and meetings with institutional investors to explain the trust’s strategy and benefits.
- Marketing Materials: Develop clear, compelling materials that explain the investment proposition.
- Media Engagement: Secure coverage in financial media to raise awareness and interest.
A strong marketing campaign can help ensure a successful IPO by building demand and confidence among investors.
8. Pricing the IPO
The IPO pricing is critical to the trust’s success. Considerations include:
- Valuation: Set a realistic valuation based on the trust’s projected performance and market conditions.
- Pricing Mechanism: Decide on the pricing mechanism, such as a fixed price or a book-building process where the final price is determined based on investor demand.
Consult with financial advisors and the corporate broker to determine the optimal pricing strategy.
9. Launch and Post-Launch Management
Once the IPO is launched, ongoing management involves:
- Investor Relations: Maintain transparent and regular communication with shareholders through reports and updates.
- Performance Monitoring: Continuously monitor the performance of the trust and adjust strategies as needed to meet objectives.
- Regulatory Compliance: Ensure ongoing compliance with regulatory requirements, including periodic reporting and disclosures.
Partnering with JTC
Launching a new investment trust IPO on the London Stock Exchange involves a detailed and structured approach. From defining an investment strategy and assembling a skilled management team to conducting test marking and developing a comprehensive prospectus, each step plays a vital role in achieving a successful IPO. Further, a robust corporate governance framework and strategic marketing ensure long-term credibility and attractiveness to investors.
At JTC we have strong experience in supporting investment trust IPOs across AIM and the Main Market of the London Stock Exchange. We have an extensive network of specialist advisors including brokers, lawyers and other professional firms with the required experience and expertise advise on and deliver successful IPOs. This is not an exhaustive list and further independent legal advice should be sought if listing.
JTC is one of the largest independent fund administrators, and the only one listed in Europe, providing a range of services to investment trusts, including administration, fund accounting, financial reporting, corporate governance, AIFM and depositary.
Following our most recent acquisition of Hanway Advisory, we have a strong team of 41 specialist investment trust professionals covering both governance and accounting looking after a sizeable portfolio of investment trusts, including REITs, VCTs and SPACs.
For more information on our listed funds services, please visit our website here: https://www.jtcgroup.com/services/funds/listing/
Please also do not hesitate to contact with Susan Fadil or Christopher Gibbons, to speak to us about preparing for your IPO journey.
