Merian has revealed it will shift unquoted companies in its small and mid-cap funds to its closed-ended Chrysalis investment trust in light of the fallout from the Woodford Equity Income fund suspension.
The investment trust is seeking to raise upwards of £100m via a placing to fund the transfer.
A regulatory filing described a “strong pipeline” and said “the additional shares will be acquired imminently from MGI’s open-ended UK small- and mid-cap equity funds”.
The companies would be purchased “at a modest discount to the latest valuation of those assets” and is “expected to be accretive to the company’s NAV”.
In March, Neil Woodford shifted £73m of unquoted stocks from his flagship Equity Income fund to the Patient Capital Trust in a failed effort to address liquidity problems that ultimately resulted in his fund’s suspension.
Heightened level of interest in open-ended funds
Dan Nickols (pictured), head of UK small- and mid-cap equities at Merian, described unquoted companies as “an asset class we believe will be highly profitable for our investors”.
But Nickols added: “We have always maintained a prudent approach to unlisted holdings, investing only in established businesses, combined with strict compliance oversight. While investors recognise the benefits of our approach, recent events have resulted in a heightened level of interest regarding this type of investment in open-ended funds.
“We believe this is beneficial to Merian Chrysalis investors, who will scale-up their exposure to these exciting businesses, and to investors in our open-ended funds, as they can retain access to these attractive investments indirectly through their holding in Merian Chrysalis, while reducing their direct unlisted exposure, without bearing the costs of an open-market sale.”
Growing trend
Association of Investment Companies communications director Annabel Brodie-Smith said the trend of investment companies investing in unquoteds was likely to increase following the suspension of the Woodford Equity Income fund.
“The closed-ended investment company structure is particularly suitable for illiquid assets as it frees up the manager from having to worry about inflows and outflows, while at the same time giving investors a chance to sell when they want to via the stock market. In contrast, open-ended funds that invest in illiquid assets can come unstuck when investors want their money back.”
Shore Financial director Ben Yearsley did not expect a number of asset managers to follow in Merian’s footsteps.
“Not many funds own unquoted stocks to any real level so there isn’t really a trend,” Yearsley said. “Overall I think it’s sensible. Open ended funds should not have unquoted stocks.”
However, he said Merian must ensure complete transparency on pricing.
Willis Owen head of personal investing Adrian Lowcock said many smaller managers don’t have an investment trust to complete such a transaction. “It is practical for Merian. They have the means and resources to hold unquoted investments outside of an open-ended structure and therefore are able to do so. Not all groups can copy them.”
