The move comes amid growing fears over open-ended funds holding illiquid assets, following the suspension of Woodford Equity Income.
In a sign of continuing concern about the liquidity mismatch of holding unlisted stocks in open-ended funds, asset management company Merian has announced that it will transfer several unlisted stocks from its open-ended funds to its investment trust.
Several unlisted companies held by Merian’s open-ended UK small and mid-cap equity funds will be sold to the closed-ended Merian Chrysalis investment trust, at a slight discount to these asset’s latest valuations.
The decision comes three months after Woodford Equity Income, one of the UK’s most popular investment funds, suspended withdrawals. The fund blocked investors taking their money out after it was unable to sell its unlisted holdings fast enough to meet a wave of redemptions.
The suspension saw both the both the Bank of England and the Financial Conduct Authority raise concerns about the seeming mismatch between open-ended funds offering daily dealing while holding illiquid, hard to sell assets. Mark Carney, the governor of the Bank of England, has warned that more funds may also need to suspend withdrawals in the event of a major market decline.
By moving some of their illiquid holdings to the closed-ended Merian Chrysalis, Merian appears to be attempting to protect against this risk. Whereas open-ended funds must sell assets to cover investor withdrawals, closed-ended investment trusts have a fixed pool of capital while investors gaining access through the purchase of shares listed on the stock market. When investors sell shares in a closed-ended trust, the portfolio manager is not required to sell any asset accordingly.
The open-ended funds, however, will still have exposure to the unlisted companies, instead through the holding of Merian Chrysalis shares. The open-ended funds will also retain a smaller direct unlisted exposure to The Hut Group, TransferWise, Starling Bank and Secret Escapes.
The trust’s purchase of the shares are being financed by the issue of £100 million worth of new shares. Around half of the new money raised will be used to finance the purchase of these existing holdings, including the acquisition of the unlisted positions currently held in Merian’s open-ended funds
The trust currently has a market cap of roughly £240 million and trades on a premium of around 14%.
Richard Watts, manager of Merian Chrysalis and the Merian UK Mid Cap Fund at Merian Global Investors, comments: “Now Merian Chrysalis is approximately 80% invested, it is an opportune time to expand the portfolio and quickly capitalise on our strong pipeline of investment opportunities.
“By using approximately half of the proceeds to acquire additional stakes in existing holdings, investors will benefit from a well-balanced portfolio, as well as the continuation of a sufficient level of full investment."
Rather reminiscent of WPCT acquiring some WEI unlisteds before WEI gated. Rather suspect for chrysalis, dressed up as something perfectly above board.