This article was written by David Eliakim and Shabarika Ajitkumar.
The falling cash rates in Australia continue to drive demand by retail investors for alternative investment products. As a result, 2019 has been another strong year for Australian and foreign investment managers raising funds through listed investment vehicles in the Australian market – particularly through listed credit investment trusts.
There were a number of successful initial public offerings ("IPOs") during this time, including the $925 million IPO of the KKR Credit Income Fund (managed by KKR), the $550 million IPO of the Partners Group Global Income Fund (managed by Partners Group), the $400 million IPO of the Perpetual Credit Income Trust (managed by Perpetual) and the $300 million IPO of the MCP Income Opportunities Trust (managed by Metrics Credit Partners). A number of listed investment vehicles also completed successful secondary capital raisings this year.
A number of key trends continue to be seen in recent offers:
- Product differentiation remains important – There remains a fine balance between product differentiation and complexity. The predominantly retail market for these products means that managers have structured offerings so that products are sufficiently differentiated but not overly complex. Considerations relating to the new design and distribution obligations (that commence in April 2021) may also impact product structuring for certain listed investment vehicles, requiring issuers to make a target market determination ("TMD") for each affected product and review the TMD at particular times. For more detail, please see our recent alert.
- Managers continue to bear upfront offer costs – The trend of managers bearing upfront establishment costs continues, with a number of managers paying all upfront establishment costs for the IPO of the listed investment vehicle. This allows the net asset value of the vehicle on listing to equal the aggregate amount raised under the IPO. The quantum of management fees and performance fees continues to vary and, in some instances, managers do not charge performance fees at all.
- Related party issues – The proposed structure of the listed investment vehicle could present related party issues under ASX Listing Rule 10.1 – particularly where the manager of the listed investment vehicle intends to invest offer proceeds into underlying funds also managed by the manager or its affiliates. ASX Listing Rule 10.1 requires a listed entity to obtain securityholder approval prior to any acquisitions or disposals of a substantial asset to certain related parties. ASX has granted waivers from ASX Listing Rule 10.1 in connection with a number of recent IPOs to allow the relevant listed investment vehicles to deploy proceeds into related funds, but these waivers have been subject to a number of conditions and limited in most cases to a period of 3 years.
- Disclosure considerations – The prospectuses and product disclosure statements for these products continue to disclose the target return and target distribution that investors should expect. Managers often also include some disclosure regarding the track record of the investment strategy that the listed investment vehicle is pursuing. These should remain key diligence areas for managers in order to ensure that there is a reasonable basis for making these disclosures and to ensure that any disclosure concerning a track record relates to a strategy that is consistent with the one being pursued by the listed investment vehicle.
If the prevailing interest rate conditions continue, there should be a strong market for listed investment vehicles in 2020. Any managers contemplating an IPO should keep the above trends in mind as part of their planning.
