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Listed private equity funds - coming soon21/03/2007. Source: SJ Berwin. Stephanie Biggs 
In December, says SJ Berwin, the UK’s financial services regulator, the Financial Services Authority published a second consultation paper on updating the listing rules for investment entities, following on from its initial consultation in March last year. In its latest submission, the British Private Equity and Venture Capital Association welcomes the revised proposals. The FSA has taken on board the comments made by the BVCA in response to the previous consultation, and the suggested changes could open the door for private equity funds to achieve a London listing. The key proposal is that the prohibition on listed investment entities controlling the portfolio companies in which they invest should be dropped. If the proposal is implemented, funds following a typical private equity investment strategy will no longer be prevented from listing simply because they take majority stakes in their portfolio companies.
The FSA originally felt that the prohibition was necessary to prevent companies that were really trading companies from using the investment entities listing regime as a back door route to listing, bypassing the need for a three-year track record. However, as the BVCA confirms in its submission, there are other ways of distinguishing trading companies from “real” investment entities.
Even where investment funds take controlling stakes in their portfolio companies, those portfolio companies continue to be separate businesses, distinct from each other. Unlike in a trading group, there are no central treasury functions, and no cross-guarantees between portfolio companies. So there is little risk that a trading group could successfully masquerade as an investment entity.
If implemented, this change will be very welcome, but it does not go all the way. As the BVCA pointed out in its first submission, the rule that the board of directors of a listed investment entity must be independent of any investment manager causes a problem for private equity funds, where the fund is invariably controlled by, and investment decisions are taken by, the fund manager. The BVCA recommended that this rule should be reconsidered, arguing that investors can be adequately protected by disclosure of the composition of the board of the listed entity, and the appointment of independent, non-executive directors.
The FSA is highly conscious of its obligation to ensure adequate protection for investors, especially retail investors. However, the FSA is also clearly conscious of the pressure of international competition, and the need to ensure that the UK is an attractive jurisdiction in which to list. So, although it is not proposing to abolish the requirement for an independent board of directors for listed investment entities generally, the FSA is looking again at what is known as the “directive minimum regime”.
The “directive minimum regime” applies only to overseas companies, and imposes only the minimum obligations required under EU law, and not the full UK listing rules. Importantly for private equity funds, the “directive minimum regime” does not require the board of directors of the investment entity to be independent of the investment manager - and other exchanges such as Euronext do not impose any such requirement.
To encourage UK listing by overseas investment entities, contrary to its original proposals, the FSA is now proposing to continue to allow non-UK funds to list in the UK under the directive minimum regime (“Chapter 14”), although they will still be able to opt for a listing under the full UK rules if preferred (“Chapter 15”).
The BVCA acknowledges that there is a balancing act to be performed between maintaining UK’s competitive position and protecting investors, particularly retail investors, from unsuitable investments, but believes that, in practice, the risk of retail investors acquiring unsuitable investments in funds listed under Chapter 14 is low.
So the BVCA is generally supportive of the proposal to offer a dual listing regime - at least for overseas entities - believing that the Chapter 14/Chapter 15 distinction will provide a good indication of whether a fund is intended for retail investors. However, if, following consultation, only a single, Chapter 15 regime is to be offered, it should be reviewed in order to develop “a single-tier listing regime that would be as attractive as possible to a wider range of investment entities than before while respecting the key concerns on investor protection”.
Stephanie Biggs
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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