WIM was unable to provide further funding to them unless the securities held by the WEIF were listed, which meant they would no longer be affected by the 10 per cent limit.
Subsequently, each of these four companies listed shares in their companies on The International Stock Exchange (TISE) in Guernsey.
Even with the businesses becoming listed, prior to the suspension of the WEIF on June 3 2019, there were no arm’s length market dealings in any of the TISE securities, and only one trade recorded for any of the securities.
Additionally, the securities were valued by Link using fair value pricing at all stages, even after their listing.
This meant that the fund held assets that remained illiquid even after listing, increasing the risks of liquidity issues arising, the FCA concluded.
But Link did not change its treatment of the securities in the TISE companies from a liquidity perspective, being aware that the relevant listings were likely to be, at most, thinly traded.
Additionally, it failed to give sufficient consideration to the potential implication of the WEIF holding what it knew would be illiquid assets, in addition to those within the 10 per cent limit.
The FCA said: “It was entirely foreseeable by Link that the use of the ‘intention to list’ process increased liquidity risks. It created an ability to invest in more assets within the WEIF which were of the same characteristic in liquidity terms as unquoted assets.
“WIM capitalised on this opportunity not only to continue to hold the assets once they had been removed from the 10 per cent unquoted restrictions but, significantly, in some cases to increase the holdings in the TISE assets above the amount originally held.”
The regulator added: “Link was aware that WEIF held a high percentage of unquoted securities.
"Link failed to give sufficient consideration to the potential implication of the WEIF holding what it knew would be illiquid assets, in addition to those within the 10 per cent limit.
“Link failed to sufficiently recognise the risks of increased levels of illiquid assets being held and the increased risk of liquidity issues arising. Link should have been fully aware of the risks and acted to prevent the repeated use of this process which enabled a higher level of illiquid funds to be held.”
Where did it begin?
WEIF did not start out this way.
The fund made its first investment in unquoted securities in June 2014 – the month after it was launched.
