One of the many headwinds facing the UK trust space is the paucity of flotations. Initial public offerings serve a useful purpose in replenishing the pipeline of new ideas that pulsate through the investment universe, picking out new themes and strategies that investors large and small want to deploy money into.

In the world of institutions, private credit is hot at the moment, with barely a week going by without some new mandate or strategy emerging. I make no comment on the risks and opportunities of private credit, but note that a huge wave of money is flooding into private credit funds searching for differentiated forms of income. Ironically, the UK-listed funds sector was a pioneer in this little-understood asset space, with dozens of funds launched over the last decade. On paper, the London market and its closed-end funds are in an ideal spot to benefit from this new issuance boom.

BioPharma Credit’s discount fiasco

Call me cynical (and plenty do) but I suspect that one of the many reasons why London is missing out on new private credit fund formation is because of the experience of funds such as BioPharma Credit (BCPR ).

I will say that I am a big fan of this specialist lending fund and it constantly features in my income buyers’ lists. It ticks lots of boxes in my view, most importantly that it succeeds where many private credit funds fail: getting back the money it lends to specialist life sciences firms, in many cases with extra fees on top for early repayment. It hasn’t entirely avoided losses – its loss on one investment last year, LumiraDx, still returned 82% – but it has continued to pay out a steady income from lending to a specialised space of largely listed life sciences firms raising debt capital to fund scale-ups.

Crucially, with gross assets of £1.3bn, BioPharma Credit is big enough to be liquid, widely followed and well-researched. At a current discount of 9.2% to net asset value, I rate it a strong buy with a more sensible discount below 5%. In the meantime, you can pick up a near-8% yield.

But – and you knew there was a big ‘but’ coming – for the life of me I can’t understand why the managers bother with London and the public markets. Frankly, the demands placed on it by public market investors are a diversion and, in many cases, actively work against this form of private credit strategy. The most obvious problem is discount control, with the discount shooting out to as much as 20% in some months but most of the time lurking in the 5%-10% range. According to Deutsche Numis, the 52-week average discount is 11%.

To keep pernickety UK investors happy, it had to come up with various iterations on a discount policy which currently operates as follows (and here I quote from a recent Deutsche Numis note): ‘a discount-triggered buyback, whereby if the discount is wider than 5% over a three-month period it would use 50% of principal, subject to meeting the dividend, to repurchase shares until the discount averaged narrower than 5% over a two week period. In addition, if the discount was wider than 10% over six months, it would apply 100% of the capital and income proceeds from repayments from the six-month period until the discount was less than 5%.’

Got that? Not sure I have, but let’s leave that to the side. The small snag here is that as Deutsche Numis goes on to comment, the current buyback policy meant the fund was unable to participate in investment opportunities as cash was tied up. To be specific, BPCR was unable to participate in a $100m senior secured loan investment in Urogen Pharma with a 12.8% coupon. More generally, there’s the not-insignificant issue that this acts as a cash drag on returns – a cash reserve of $155m has had to be kept aside solely for buybacks. Given the lumpy nature of its investment pipeline, you can understand why the board and the manager are now suggesting a new policy for buybacks.

Private credit’s regulation woes

Stepping back from the details of this particular episode, let’s paint a picture here. BioPharma’s investment manager Pharmakon Advisors runs both public and private funds. I’m guessing that in its private funds, there is none of this discount to NAV nonsense, lockups, simple rules about getting in and out and a general willingness to accept that this is an illiquid asset class that requires some degree of caution and sophistication from buyers.

By contrast, the public funds involve boards of independent directors, who may or may not be useful guardians of investors’ money, lots of expense via advisers, complicated rules around buybacks, frequently ill-informed speculation about its underlying investments, analyst notes belabouring its cash mountain and its pipeline of deals, and then there’s the discount which shoots up and down with gay abandon.

As I have already noted, as a paid-up cynic, I can’t understand why any private credit manager would bother with the hassle the public markets impose on private credit strategies. And I haven’t even got to the bit about massive ESG reports and shiny reports and accounts yet.

Now I suppose at this point brokers will say, ‘Ah David, the prestige of running a public mandate and a fund is worth all the bother’. But is it? I think that once may have been true, but I’m not so sure anymore. One of the side-effects of the London-listed funds’ bubble and subsequent bust is that the prestige of its closed-end fund market is much diminished with the only saving grace being that no other European or American exchange has tried to muscle in and launch a sensible rival. A clue to the competition: get some strategy pointyheads working on that proposal.

Stepping back from these cynical observations, my broad point is that private credit is a complex beast – as are many private asset structures – and it doesn’t fit easily into the draconian reporting requirements demanded by public market investors. Now, if we assume that all this private credit/private asset stuff is just too damned complicated for public market investors, fine. Maybe London should stick to simple equity mandates.

But if we decide that there is an opportunity in private assets and especially private credit – and I think outfits like BioPharma show that there is – then we need to be honest and say the current regulatory and reporting regime isn’t working.

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