News
Liquditiy: Suspension - Wind up - Liquidation, is this a sign of things to come...
Saturday 19th October 2019
Ryan Johnson
The industry needs to be very careful not to overreact in the current climate and be mindful of the message enforcement actions give to the investor under the current rules and regulations.
The current rules on liquidity and what is deemed as acceptable will be assessed and quite rightly. However this must be done in a considered, controlled manner as to not destabilise an already fragile market place as it has the potential to.
Furthermore on the basis a formal FCA review into liquidity is still to happen and conclude, it is important we do not start to apply stricter conditions or insist on tight timelines for correction on perfectly well managed funds and competent fund managers on the basis of what has happened with other funds recently.
On 30th September 2019, the FCA published its conclusion for new rules regarding liquidity involving property investments, stating this was the approach to be taken for Non UCIT funds only and to be applied in 2020.
To second guess what any review may conclude or apply a stance based on recent events would be dangerous and send a conflicting message to the marketplace, potentially erode investor / wider public confidence.
As a consultancy firm specialising in this area we are experiencing a recent noticeable increase of requests and demands currently from managers who are being approached regarding the liquidity within their fund and a strong message of communication raised, that is of some concern to what is achievable.
The strong message being consistently communicated to these managers, 'if illiquid positions, % / exposure, are not corrected (brought in line) over a short term then the fund(s) run the risk of being suspended regardless.'
The knock on effect of the recent issues has resulted in an attitude and approach to managers, who have already been in suspended status or about to have their funds suspended by the ACD / Depositary, is that they will have 3 suspension cycles (3 x 28 days) to correct their positions before being wound up.
This approach and stance, whilst decisive, can be contrary to operating in the best interests of the investor or the intended purpose of the tool relating to suspension.
I appeal to the ACD and depositary to carefully assess the fund and appreciate the nature of illiquid positions do require time and patience in order to reduce in a controlled and sensible manner for the sake of the investor.
In addition pulling the 'trigger', without excessively exhausting and assessing every alternative option will create a negative detrimental impact to investors whilst placing enormous pressure on managers to perform and could destroy the industry as a whole.
In contrast it is important that the current rules are adhered to, regardless of whether they are appropriate or not. I highlight 'current rules' in support of Andrew Bailey's comments at the last treasury select committee where he stated 'there is a problem with the current rules as they are not suitable and do need to be reviewed'.
It is also important, as the ACD and Depositary begin to apply pressure / become more stringent, do so, while respecting managers with legacy issues and understand what it means to have illiquid positions.
The investment universe has a limited ability to sell down illiquid positions quickly and therefore must be given a meaningful and realistic timeframe.