Goldman Sachs (NYSE:GS) today closed the funding round for another US$5.2bn (£4.3bn) direct private markets fund, which comes a day after Jupiter Fund Management PLC (LSE:JUP) sold off a stake in a rising fintech star and said it was no longer going to invest in private companies.
These two things may seem related and that the FTSE 250-listed asset manager is taking a vastly different position to the Wall Street colossus on the prospects for growth companies.
However, while Goldman Sachs (NYSE:GS) Asset Management’s new West Street Global Growth Partners fund will be dedicated to private markets, seeking to back businesses in the early or middle stages of their growth, it’s not to say that Jupiter has abandoned the unlisted corner of the investment market.
As well as saying it had sold off stakes in unlisted digital bank Starling held by its funds, the UK fund firm stated that its open-ended funds would shun investments in private companies after due to the difficulties with volatility and outflows seen last year.
Matt Beesley, chief executive of Jupiter, added in a letter to clients that “as a result of the sustained market volatility we have experienced in recent years it is also clear to us that investor sentiment towards holding unlisted assets in open-ended funds has changed”.
In the letter, which was first reported by the FT and subsequently by other media, the CEO said the group has “taken the decision to change Jupiter’s policy with regard to unlisted assets going forward.
“From now on, we will not make any new investments into this asset class through any of our open-ended funds.”
This was a fresh reminder of the liquidity issues with investing in unlisted companies, which famously led to the downfall of former star fund manager Neil Woodford’s UK Equity Income fund.
But the issue is perhaps more to do with investing in illiquid assets via open-ended funds than investing in private companies.
Open-ended funds offer investors daily liquidity but this makes them vulnerable when there are waves of investor withdrawals, with Woodford being a prime example: during a rush of redemptions it is difficult for the fund manager to sell off illiquid investments to generate the cash to pay out to exiting investors.
Property and bond funds have also been victims of a rush to the exit during times of economic turmoil, with several of the world's largest investment groups needing to suspend withdrawals from their property funds in the wake of the catastrophic ‘mini budget’ of last September and in the wake of the Brexit referendum.
The IMF last year even went so far as to warn that open-ended funds pose a “serious risk to financial stability” and are a “major potential vulnerability” of the global financial system, after to property fund suspensions by the world's largest investors.
Closed-ended funds, on the other side of the coin, are suited to holding illiquid investments as they have no need to sell assets when investors sell their shares.
In fact, one Jupiter-managed fund did snap up £20mln of the Starling stake, which was a closed-ended vehicle, Chrysalis Investments Ltd (LSE:CHRY), an investment trust where Jupiter own around a 23% stake, no less.
Analysts at Winterflood research said they believe that Jupiter's policy change “is sensible” due to “the pitfalls of investing in illiquid assets through open-ended vehicles”.
“The closed-end fund structure clearly is a more suitable mechanism to deliver liquidity transformation, and we applaud Jupiter for formalising this recognition.”
And Nick Britton at the Association of Investment Companies (which represents the closed-ended fund industry) said: “Investment companies are a great structure for holding illiquid assets, such as private companies, because managers don’t have to sell assets when investors sell their shares.”
However, Winterflood said the Chrysalis investment was not so simple, as it now had a 15% concentration in Starling Bank, which would be “among the larger single holdings across the investment trust universe” and presents “a risk which investors should monitor closely, particularly given Starling Bank's youth, single-country exposure and vibrant competitive landscape.”
Analysts Stifel also cautioned on Chrysalis’s purchase, downgrading to a ‘sell’ recommendation due to its “limited” cash resources and more concentrated portfolio.
“Perhaps Chrysalis will sell an asset in the near term, with this boosting cash on the balance sheet. However, without this we think the balance sheet risks are growing and there is also increased company-specific risk with Starling Bank now 15% of NAV, compared to 12% prior to the purchase.”
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