When executing transactions, firms are required to demonstrate that they have taken “all sufficient steps” – a higher standard than the current “all reasonable steps” criteria – to obtain the best possible result for their clients, taking into account the execution factors. The execution factors are: price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.
When the funds are unlisted, seller/buyer representatives would typically explore execution options offered by the fund manager: for instance subscription and pre-emption events, redemption windows, matched bargains (where the manager directly matches buyers with sellers). “All sufficient steps” raises the best execution bar: it obliges such investor representatives to consider alternative venues to execute a client order. If the fund units are tradeable on platforms – commonly known as ‘the secondary market’ - there may be the prospects of achieving a better result via this secondary market.
The secondary market for units in institutional unlisted (open and closed-ended) funds – holding underlying UK and European real estate – has grown significantly in recent years with an estimated £2bn (USD 2.66bn) traded in 2016.
Seller and buyer representatives, who operate within MiFID investment firms, should have regard to opportunities presented by the secondary market. The new obligation to demonstrate “all sufficient steps” has been taken to achieve best execution under MiFID II.