EXCLUSIVE-First publicly listed diamond fund to launch

A trader displays white diamonds produced in India at the 18th International Jewellery Tokyo 2007 fair in Tokyo January 24, 2007.

LONDON (Reuters) - The first publicly listed fund investing in rare white and coloured diamonds is close to launching on the London Stock Exchange, fund and market sources said on Tuesday.

The closed-end fund will invest in the high-quality segment of the physical polished diamond market, according to a prospectus for the initial public share offer, expected to take place on June 24, obtained by Reuters.

Fund-raising will close on Wednesday and one industry source said institutional investors had raised nearly $100 million (50 million pounds).

"Catalysts for growth in investment demand are in place for large high-quality diamonds, underpinned by the rising number of high net-worth individuals, especially in the Middle East, Southeast Asia and the Russian Federation," said the prospectus for investment company Diamond Circle Capital plc.

The prospectus said a steadily declining mineral reserve base, compounded by limited exploration success, suggested tight supplies would continue, which industry analysts say could mean long-term growth for the fund.

"It is the first listed polished diamond fund," said Jamie Strauss, managing director, UK equity products, of BMO Capital Markets (Bank of Montreal), who closely tracks diamond markets.

"It will be invested in white and coloured diamonds. It will become one of the world's finest diamond collections."

Diamond Circle Capital's investment advisers, Diapason Commodities Management SA, declined to comment. Placing agent UBS Investment Bank also could not be reached for comment.

PRECEDENT

While the top-tier diamonds market is booming, diamonds can be a risky investment.

Almost 30 years ago, an investment company called Thomson McKinnon set up a $10 million diamond investment trust, which was approved by the U.S. Securities and Exchange Commission, but it was wound up after a sharp fall in the diamond market.

Martin Rapaport, a leading diamond entrepreneur, whose wholesale polished price list is a benchmark for the global diamond trade, said a diamond fund was a risky investment as there was no guarantee that prices would rise indefinitely.

However, he noted that recent auctions of rare diamonds and finest jewellery had achieved world record prices per carat, driven by an increased concentration of super-wealthy individuals seeking the rarest gemstones available.

The recent semi-annual sales of diamonds and jewellery at Sotheby's and Christie's auction houses in Geneva achieved all-time high prices, and several senior trade figures believe that the near-term outlook for rare stones is buoyant.

"There is a real investment demand for diamonds," Rapaport told Reuters. "But it's a risk. It's dangerous. It depends on external economic forces."

Rapaport said that he doubted that a $100 million wall of money was enough to have a significant impact on the top end of the polished diamonds market.

The fund is expected to make limited sales of diamonds from its portfolio from time to time, a market source said.

Two independent valuers will assess the portfolio monthly, enabling Diapason to track its net asset value.