Last year was a stellar time for trust fundraising, with new strategies raising almost £4bn and secondary raises totalling almost £11bn. The picture could not be more different in 2022 where plans for new trusts have been shelved due to a significantly worse macroeconomic environment.
“Market indigestion following very high IPO activity and additional equity raised existing issues last year,” says David Hambidge, investment director of multi-manager funds at Premier Miton.
“Plus, poor investor sentiment, falling stock markets, rising bond yields and tighter monetary conditions generally are all keeping a lid on new issuance. In addition, the rating of many trusts has fallen. It is very unusual to raise new equity on anything other than a premium to NAV and for IPOs, and if competitor trusts are trading on a discount that will make it difficult to raise cash at a premium.”
This market uncertainty has had a direct impact on IPO appetite and Nick Britton, head of intermediary communications at the Association of Investment Companies (AIC), points to numbers that don’t lie.
“For example, in 2020 there were six IPOs, with only one in the first half of the year,” he says. “In 2021, 16 new investment companies came to market. There are IPOs in the pipeline for 2022, waiting to be launched when conditions are right. While investors remain nervous, however, it’s likely they will continue to favour existing companies.”
Safe to go back into the water?
With firms less confident to bring new trusts to market against this backdrop, it is unclear as to when IPO activity will resume. Quite simply, it could be a case of waiting for market conditions to reverse says Dan Summerland, associate director of investment trusts at Fidelity International.
“Investor sentiment is pretty low, and the outlook is gloomy,” says Summerland. “Positive news on company earnings, signs that inflation is moderating and better than expected GDP numbers would all help. That would translate into greater confidence from investors to put money to work.”
Unfortunately for investors, consensus forecasts do not predict a near-term return to inflation normality and the Russian/Ukraine conflict shows no signs of stopping. According to Summerland though, there could still be opportunities for new trusts despite this outlook.
“Nevertheless, there are certain markets, countries and illiquid asset classes which look promising on a longer-term view, especially in an investment trust structure,” he says. “And if something innovative or genuinely appealing is offered to investors that they can buy into, I think we’ll see a greater willingness to take risk.”
Market volatility and inflation are not the only metrics firms are watching, as new trusts wait in the wings. The performance of existing trusts, and how NAVs are behaving, is something Janus Henderson multi-asset portfolio manager James De Bunsen points to as important to IPOs returning.
“Trust IPOs tend to be variations on a theme of an existing, successful investment company (that usually trades at a premium),” he explains. “The manager and broker of a new IPO have to convince investors that the proposition is compelling enough to go in at launch and pay a small premium for a potentially blind pool of assets with all the risks associated with successful and timely deployment of the capital raised.
“Often it makes more sense to buy the highest-quality incumbent in that sector if it trades at a discount or is cheap relative to history.”
Headline-grabbing rises in inflation and falls in markets may be an obvious reason trust IPOs have vanished in 2022, but many investors argue a slowdown in activity was inevitable. Though many trusts successfully launched in 2021, Fairview Investing director Ben Yearsley points out many others failed to get off the ground.
“When was the last really successful launch? I honestly couldn’t name it or when,” says Yearsley, adding that specialist trusts have enjoyed more success over their generalist counterparts.
“Schroder British Opportunity is possibly the last [successful generalist trust launch], and that only raised £75m – that was a couple of years ago. That’s peanuts compared to what the infrastructure and income ones have raised. It feels like it’s virtually impossible to launch a generalist trust – it feels like the generalist trust IPO market has been broken for many years with no fix in sight.”
A return to IPO ‘normality’
Given what may be required for IPO trust activity to return to its historic levels, there is a consensus view that this will remain subdued for the foreseeable.
“The September-November period after the long summer holidays is traditionally a fertile time for new IPOs or follow-on equity raises for incumbent trusts seeking to expand their strategy and portfolios – the current climate will certainly temper that,” says Richard Parfact, fund manager at Momentum Global Investment Management.
“I am aware of a handful of new trusts seeking to issue prospectuses, therefore there is a willingness and desire to raise capital for new trusts. However, it remains to be seen how the buy-side feels given the level of discounts still available in the market, not least in some of the listed private equity trusts that, in some cases, are sitting on discounts to NAV of close to 50%.”
Instead, secondary raises may become more likely as more optimistic investors allocate to existing trusts. These vehicles have the advantage of already being established, something investors may favour over new strategies being brought to market.
This is the view of Nick Wood, head of fund research at Quilter Cheviot, who does not expect a return to a “buoyant” market.
“There are always soundings within the market of potential new offerings, many of whom don’t make it to market, and that remains the case on a relatively small scale,” says Wood. “Clearly, investors are highly conscious of the impact of inflation today, whilst within the trust space options that focus on sustainability and ESG more broadly retain their appeal. However, I suspect we will see much more by way of ongoing capital raises by current investment trusts than from IPOs.”
