LSEG has seen more IPOs this year than ever before—what has led to that increase? How does this compare to other exchanges around the world?
Since January 2015, when the Swiss National Bank made the surprise announcement regarding the cap to the euro, followed by the European Central Bank’s introduction of quantitative easing, we have seen the start of a new macro environment with negative interest rates in continental Europe joining those of Switzerland and the Nordics. Long-term investors like pension funds are looking for growth, and that increasingly is manifesting in demand for equities and funds, and particularly real assets.
London Stock Exchange Group (LSEG) has seen a surge in what historically is a tremendous strength of the London market—the listed funds segment—and the fact that we’re able to offer flexibility in how people can raise funds. In 2017 to date, we have seen 18 closed-ended fund and REIT initial public offerings (IPOs), compared to just four in 2016, that is four-and-a-half times growth in the number of funds, and a threefold increase in value. The actual figure raised by these IPOs this year is £1.6 billion, compared to £560 million in 2016.
Perhaps more interestingly, by number of REIT and closed-end fund IPOs, LSEG is the number one listing destination of choice worldwide. This year, 70 percent of REITs listed on London Stock Exchange in 2017 are trading above their offer price, reflecting increased demand by investors
As a stock exchange, we are in the enabling game. We have a regime that offers a range of structural options for those who wish to raise capital, allowing them to do so within a regulatory framework that maintains high integrity. We like to provide flexibility for those who have the motivation to get their business done.
Clearly the macro environment is helpful. When you have low real returns and investors seek to achieve long-term growth objectives, real assets become increasingly attractive. Because of the contracting nature of buying actual real estate, the syndicate—the exposure to that asset class through funds—can be a very efficient way for investors to access this asset class and diversify their portfolio.
How does the environment in the UK compare to other European countries?
All global investors, whether from the UK, Europe, North America or Asia, find it very easy to access the markets in London, and we hear a number of themes from issuers: They can raise capital in an environment with a broad spectrum of international investors; the costs of listing tend to be more efficient; and we particularly hear from North American investors that the lack of a culture of class action suits is a big positive.
London is well developed, has a broad spectrum of investors and efficient processes and mechanisms for raising capital. That’s a winning combination.
Another observation is that the UK is implementing a mandatory auto-enrolment programme for companies to invest on behalf of employees into direct-contribution pensions—similar to the positive experience of Australia’s superannuation scheme. That could be a source of significant incremental demand for equities in the near future, and it’s not outside the realm of logic that other countries will start to look at this as well.
Not only do we have the macro environment of low real returns, low interest rates and low volatility driving long-term investors to look for equities and growth in real assets, but there is going to be further demand for more long-term investment, driven by the cyclical change coming from that direct contribution dynamic. Pensions have to invest for long-term return, looking after the long-term financial health of a growing population.
What kind of assets are REITs investing in in the UK? Have you seen any particular trend?
What is particularly interesting is the examples of funds that provide a positive contribution to the real economy. For example, PRS REIT is the first listed fund to focus solely on private rented sector (PRS) properties. When interest rates become low, property prices go up, and for many, housing stock is limited. This fund is building new housing stock and making it available to rent, allowing investors to get that exposure. This is the first fund of its type in the PRS, and the UK government co-invested 1 percent with it, so that’s a really positive story.
Another example is Impact Healthcare Trust, which raised money to invest in a portfolio of care homes. The words that come up again and again are ‘private rented’ and ‘social housing’—these are great examples of the capital markets contributing to the public good. Green finance, socially responsible investing and environmental and social governance are also increasingly a big theme.
What does an IPO mean for a REIT?
The fact that we have a global spectrum of investors that are able to access London—a developed market with a very well-respected regulatory framework and an established market mechanism to buy and sell—can be very attractive for investors worldwide at a time of very low structural volatility, very low interest rates and yet a demand for long-term growth.
There’s a whole spectrum of investment value propositions for investors to choose through the funds sector, and the advantage of these funds is that you can buy and sell them on the stock exchange just like you can with an equity share.
Some of these structures have been around for many years, but the demand is growing. What’s also important for REITs, closed-ended funds or anything else, is that coming to market in the first place adds a lot of intangible benefits. The process of due diligence that’s inherent in the process shows credibility, and allows prospective investors to focus on management decisions and the value proposition.
Also, once the company is listed, the ability to raise follow-on capital becomes far more straightforward. There’s a very efficient process to raise the fund, but as it continues to grow and realise its ambitions, follow-on issuance also becomes available. The community of investors active in London understands the asset class—the ecosystem has been built up around the fund managers.
How are UK real estate funds reacting to the ongoing Brexit negotiations, at the same time as managing other regulatory burdens?
Brexit is a major political event. That said, we have all lived through other major political events. As a market operator working in the private sector, our focus is to make the process of raising capital as transparent and efficient as possible.
LSEG has a number of advantages, not least in the expert community of market makers. Funds can trade on the specialist fund segment or the main market, and some trade on order books. There is strength in the spectrum of mechanisms for buying and selling, to help investors get their business done.
Year to date, the number of IPOs on our markets have increased close to 50 per cent, compared to 2016. LSEG is in a good place, servicing a multi-asset and global community of investors, and issuers are able to raise funds, fixed income and equities. In the world of low volatility, the equity story is going to begin to resonate.
The positive story for REITs listed on the London Stock Exchange is that they can also have underlying assets from geographies beyond the UK, including other regions and faster-growing emerging markets.For investors that may be challenged to gain direct access to those emerging markets, having a fund raised in London—a developed market—makes it easier to diversify, by geography as well as by asset class. A diversified portfolio will often lead a to better long-term risk-return profile, and funds are a great way to do that. London can provide this, and the good news is that this is likely to continue.