It has been the busiest year on record for investment trust corporate activity, culminating in the creation of the giant Alliance-Witan at the end of June. Much of the merger activity has been concentrated in ‘distressed’ sectors, such as property and China, but the merger of these two giants seems to suggest a new direction. Is it a one-off? Or the start of broader consolidation in the industry?
Investment trust boards have been active this year. The Alliance-Witan merger was the seventh merger for the year to date – the previous record was set in 2021 with just five mergers. The merger between Henderson European Focus and Henderson Eurotrust completed at the start of July. There have also been a number of proposed and realised wind-ups, including Digital 9 Infrastructure, abrdn European Logistics, abrdn Diversified Growth and Income, Downing Strategic Micro-cap, Abrdn Property Income and Triple Point Energy Transition.
See also: Witan Alliance merger ‘best-fit outcome’, but questions raised over WTAN’s trust holdings
The property sector has been the most active area. The merger of Tritax Big Box REIT and UK Commercial Property REIT created a £5bn trust, Custodian Property Income has also been the subject of bid speculation, in addition to the wind downs mentioned above. A merger of Picton Property Income and UK Commercial Property REIT (UKCM) was also on the cards until UKCM’s largest shareholder said it would not support the deal on the terms proposed.
Elsewhere, the activity has been focused on unloved parts of the market. The merger between Fidelity China Special Situations and Abrdn China came after a long period of weakness for Chinese markets and high discounts for the sector. JP Morgan UK Smaller Companies merged with JPMorgan Mid Cap in February, with this part of the market firmly out of fashion.
There have also been a number of ‘tidying up’ mergers for trusts within the same group – JPMorgan Global Growth & Income with JP Morgan Multi-Asset Growth & Income, and STS Global Income & Growth with Troy Income & Growth in March, Henderson High Income with Henderson Diversified Income in January, for example.
This has created increased scale at a time when investment trust buyers, particularly among the wealth managers, are sensitive to the size of trusts. It has also help deal with excess capacity in certain areas. That said, there remain areas, such as the renewable energy infrastructure sector, where excess capacity still looks to be a problem.
Laith Khalaf, head of investment analysis at AJ Bell, says: “Normally mergers are driven by falling assets or poor performance. Quite a lot of recent mergers have involved Abrdn so perhaps there may be corporate strategy at play too. Smaller investment trusts are most likely to bulk up through a merger.”
Alliance/Witan: an exception?
However, the Alliance Witan deal seems to stand apart. While Witan’s performance had been through a weaker patch, there was no immediate distress. The catalyst appears to have been the retirement of long-standing chief investment officer Andrew Bell, but both trusts were large enough, and had sufficiently loyal shareholder bases, to stand independently.
Khalaf believes the Alliance-Witan deal is idiosyncratic, driven by the retirement of a manager running an uncommon investment strategy and is unlikely to be repeated elsewhere. William Heathcoat-Amory, founding partner, Kepler Partners, agrees: “The Witan/Alliance Trust merger is the “continuity vote”. We understand that the board considered over 80 proposals. A single-manager strategy would have represented quite a big change to what Witan has been offering for 20 years, which is an open architecture multi-manager offering.
“When a long-standing manager of any trust retires, unless there has been an obvious candidate to succeed in-house and there has been a long running succession plan, boards will almost always review their management arrangements. Shareholders own a trust for a number of reasons, but most obviously because they believe in the investment strategy, and the ability of the manager to outperform over the long term.” He says the Witan/Alliance Trust merger ticks all of the boxes: better liquidity, lower charges, a move up in the index rankings into the FTSE 100.
See also: Nine in 10 advisers expect sector M&A to accelerate
He doesn’t believe it fires a starting gun for wider consolidation, in that there were a number of idiosyncratic factors that made this tie-up sensible. He adds: “Mergers need to be pretty compelling to beat a wind-up and return of capital.”
Wider consolidation?
Matthew Read, senior analyst at QuotedData, says: “The market tends to go in cycles – moving between raising capital in more buoyant times, either from launching new funds or expanding those that are in vogue and trading at a premium – to consolidating the sector in leaner times when there is naturally more pressure for funds to do so. Consolidation can take various forms – be it a greater emphasis on buybacks, tender offers, winding up less well-performing funds and returning cash to shareholders, or merging funds to achieve greater efficiencies and improved liquidity.
“It is fair to say that, although there have been some tentative signs that the IPO window could open a crack with recent moves to bring a couple of new funds to market, the emphasis is still on consolidation, which tends to give rise to M&A activity.”
He believes M&A is most successful when it is negotiated, rather than hostile. If the board has been able to agree a price that it thinks is fair, the transaction is more likely to run smoothly, keeping the costs down for both parties (particularly legal costs). He adds: “The alternative is to launch an unsolicited bid for a fund, but this will tend to put the board and manager on the defensive and they are more likely to question whether the suitor is trying to grab their assets on the cheap and take actions designed to thwart the approach. This inherently pushes up the costs for both parties and, although it is often overlooked, can become a significant distraction from the day-to-day running of a fund.” For the time being – and in spite of arbitrageur activity in the market – these hostile bids have been limited.
His view is that the property sector still looks ripe for consolidation as do many of the other alternative asset funds that have long-lived assets – for example renewables and infrastructure – that have been impacted by higher interest rates and in some cases concerns about a shifting regulatory outlook. However, he says tthere are complexities in corporate activity in areas with illiquid underlying assets such as wind farms, or private equity holdings. He adds: “It can take a long time to work your way out of these assets, which is why the market shies away from them.”
Even if these mergers are not the start of broader consolidation, they show that the investment trust sector is increasingly willing to take difficult choices to deliver value to shareholders. This suggests a sector working effectively.
