A spate of investment trust IPOs after a six-month drought induced by the coronavirus outbreak and lockdown has surprised investors due to the dominance of products in the UK equities space, when launches typically take place when a sector is running hot.
Last week, Tellworth British Recovery & Growth published its prospectus for a UK multi-cap portfolio to be managed by Paul Marriage, John Warren and Johnnie Smith, while Sanford Deland announced its intention to float the Buffettology Smaller Companies investment trust as did Schroders with the Schroder British Recovery trust, which would invest in public and private UK companies.
The trio of investment trusts comes as investment trust IPO activity finally picks up after zero launches during the period following the Covid-19 sell-off, which kicked off in late February. Only the Nippon Active Value investment trust has been launched in the year to date, raising £103m in the days before the coronavirus sent markets into a spin.
The Triple Point Energy Efficiency Infrastructure investment trust and Home Reit, which aims to provide accommodation for people who have been homeless, are the two other investment trusts that are currently in the midst of investor roadshows as they try to raise £200m and £250m respectively for their IPOs. But unlike the UK equities trio, both portfolios are in asset classes where other investment trusts are trading at premiums and represent a continuation of IPO activity in the alternatives space.
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‘Three launches in a sector that’s the complete opposite of hot’
“The really unusual thing here is that you’ve got three launches in a sector that’s the complete opposite of hot,” says Premier Miton fund manager Nick Greenwood, who runs the Miton Global Opportunities investment trust, which takes a special situations approach to closed-ended funds.
“The one problem with the closed-ended structure is you effectively have to raise all the money in one go, and that’s nearly always in a hot sector.”
The AIC UK Smaller Companies sector is currently trading at a 12.9% discount and has traded within a range of -3.3% and -16.3% over the last five years, according to AIC data. The most recent IPOs have achieved brought in less capital than the amount being targeted by Tellworth, Sanford Deland and Schroders with the the Odyssean Investment Trust raising £87.5m in 2018, while the Downing Strategic Micro-Cap trust raised just £55.6m a year earlier and Miton UK Microcap raised £50m in 2017.
The current UK All Companies sector average discount is even wider than its UK Smaller Companies counterpart at 13.2%.
Association of Investment Companies communications director Annabel Brodie-Smith describes it as “highly unusual” for an out-of-favour asset class like UK equities to see so much IPO activity. “From an investor’s perspective it makes much more sense to invest in a launch when a sector is struggling as there’s scope for a turnaround in performance but in reality investment trusts are usually launched when a sector is popular.”
Brodie-Smith describes the Mobius Investment Trust as a recent example that bucked the trend, raising £100m in September 2018 but falling short of its £200m target, despite the star power of Mark Mobius.
Greenwood presumes the three UK equity investment trusts have enough cornerstone investors to get off the ground, but competition may limit the size of each trust. “It will be hard work with three going at the same time.”
QuotedData head of investment trusts James Carthew is more pessimistic. “Our guess is that not all of these UK funds are going to get away. Tellworth’s head start and its commitment to keep the discount tighter than 5% might make all the difference.”
He points out Jupiter UK Growth threw in the towel this week. Despite the appointment of Richard Buxton in May following Jupiter’s acquisition of Merian, assets in the trust dwindled from £48m to £26m and shareholders are set to vote for the investment trust to be liquidated.
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Lifting of coronavirus uncertainty helps IPO activity
Collectively, the UK equities trusts are targeting £450m with boutique firms Tellworth and Sanford Deland each targeting £100m while Schroders, which has its own wealth management division and multi-manager teams, is targeting £250m.
That represents half of the £900m being targeted by the investment trusts that have announced their intention to IPO.
Buffettology Smaller Companies manager Keith Ashworth-Lord attributes the pick up in investment trust IPO activity after a barren year to markets coming out of a period of uncertainty brought on by the pandemic. “We’re starting to see comments now from companies that are not just based around their survival, in terms of cutting dividends and capex and furloughing workers. We’re actually seeing now some businesses that are coming through this unscathed.”
Sanford Deland had initially planned to launch the investment trust in May, but its timeline got pushed back due to the virus.
Carthew says IPO activity typically picks up in September after the summer holidays. “As the summer wore on and hopes that the worst of Covid were behind us grew, the dust was blown off a few of the prospectuses that the advisers had been working on earlier in the year,” Carthew says, noting the pandemic stopped several planned investment trusts going to IPO in Q1 2020.
While Covid-19 has put a dampener on IPO activity, secondary fundraising has remained comparatively buoyant with £4bn raised in the year to date, according to AIC data. In 2019, £7.3bn was raised during the entire year and that was strong compared to 2018 when £4.8bn was raised.
Brodie-Smith says IPOs are typically much more complex than fundraising for an existing trust and can take months to get off the ground. “As an investment trust IPO is the creation of a new company, it will involve recruiting a board or directors, applying for a stock exchange listing and creating the new legal entity, as well as fundraising.” In contrast, tap issues or private placings can often complete in a number of days or weeks.
Arms’ length investor meetings present another hurdle for IPOs
Another hurdle for investment trust IPOs is that social distancing has put an end to in-person meetings with potential investors. Nippon Active Value, the only investment trust IPO this year, was admitted to the London Stock Exchange a full month before the UK went into lockdown.
“I cannot think of an IPO offhand in the investment companies sector where we’ve not actually physically met the manager,” says BMO Gam fund manager Peter Hewitt (pictured), who runs the BMO Managed Portfolio Trust, which invests in closed-ended vehicles through both a growth and income portfolio that investors can access through different share classes.
“I mean you get lots of information, but there’s no question, these meetings are not quite as productive. When it’s over a Zoom call, it’s very transactional you get told: ‘this is the PE of our portfolio’, ‘this is the yield’, ‘this is our style’. You get a lot of information but it’s really harder to make your judgement.”
Nevertheless, Hewitt is “quite tempted” by Tellworth, where he has had a one-on-one meeting with the fund managers, and says the BMO Gam multi-asset team is interested in the Triple Point Energy Efficiency Infrastructure investment trust and Home Reit for its ESG portfolios.
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ESG demand remains encouraging for investment trusts
Carthew thought Triple Point Energy Efficiency Infrastructure and Home Reit were likely to experience more demand than the UK equity portfolios.
“Both offer attractive, long-term income streams which can support relatively high yields. Tackling energy wastage and homelessness are also positive feel-good stories. They help diversify investors’ returns and they are much more likely to trade at premiums to asset value.”
Triple Point partner Jonathan Parr says launching in the energy efficiency space is helpful in the age of ESG. “We see really quite a lot of demand when it comes to the way investors are carrying out their due diligence. Often one of their headline questions is around ESG.”
He adds: “There is tremendous amounts of support coming from government in terms of energy efficiency measures, not least because of announcements that were made by Rishi Sunak in the summer statement a couple of months ago about various efficiency measures to support the green recovery, which was great to focus investors’ minds on the investment strategy and what we’re looking to do.”
An average premium of 15.5% in the AIC Renewable Energy Infrastructure sector is also encouraging, he says, with no constituent currently trading at a discount.
“As far as we’re concerned, we are pretty good value compared to others in the investment trust space because investors can, through the IPO, buy shares very close to NAV.” Initial fees at launch on Triple Point Energy Efficiency Infrastructure are 2% so the NAV will start off at 98p.
See also: Are financial advisers ready for Covid-driven swell in ESG demand?
Zoom helps investment trusts meet with more investors
Parr says he is “quietly confident” the Triple Point investment trust IPO will be successful. “We’ve started to receive some firm orders already, which is really encouraging.”
Last year, three new products launched in the Renewable Energy Efficiency sector raising £639m: the US Solar Fund, Aquila European Renewables Income and Octopus Renewables Infrastructure, which raised £350m in December.
The Triple Point team has conducted over 100 meetings since its “early look” presentation in July with investors including a range of wealth managers, local authority pension funds, institutional investors and some international investors.
“We’ve seen many more investors than perhaps we would have done were we out on the road and it might change the way in which investor roadshows go in future,” he says, suggesting it is likely to involve much more video conferencing with fewer in-person meetings.
Sanford Deland Asset Management is doing all its investor meetings for the Buffettology Smaller Companies launch via Zoom. “It’s OK, but you do miss some of the subtle nuances of face-to-face interaction,” says Ashworth-Lord.
Marriage does not think video conferencing is having a massive impact on their interaction with potential investors saying “we are pretty used to video calls now”.
Woodford could spur more equity investment trust launches
While the return of equity investment trust launches surprised many, Premier Miton’s Charlotte Cuthbertson, who is deputy manager on Greenwood’s open-ended fund of funds Miton Worldwide Opportunities, reckons the investment trust structure shouldn’t be limited to alternatives.
In 2019, Baillie Gifford’s Schiehallion, which raised £360.6m and sits in the Growth Capital sector, was one of the only equity fund launches while virtually all the remaining £1bn raised was in the alternatives space or specialist equity sector.
But Cuthbertson says: “There’s been a bit of a sea change in the market with the undoing of Woodford. It’s interesting that investors are increasingly thinking for asset classes that are less liquid that the investment trust structure is perfect for that, and that doesn’t have to be just alternatives, it can be equities too.”
On Thursday, investors trapped in the former Woodford Equity Income fund were told by Link Fund Solutions they could be waiting until mid 2021 until the fund’s wind down is concluded, two years after its initial suspension.
She says it’s an exciting time for investment trusts. “It’s been open-ended or nothing for a long time, but liquidity in the market has deteriorated a lot over 10 years, and investment trusts are sort of the right answers to that.”
See also: Has Woodford changed DFM attitudes to unlisted companies?
UK equity trusts can always raise more capital later
As a special situations portfolio, Premier Miton rarely participates in IPOs, but it tapped into the Merian Chrysalis launch after a meeting with manager Richard Watts. Greenwood had not expected to invest because there were so many private equity investment trusts trading at a discount at the time. But he says it has been a “stunning success”.
The investment trust raised £100m at launch in November 2018, half of what it had been targeting, with Fundsmith’s global smaller companies portfolio, Smithson Investment Trust, stealing Merian’s thunder and raising a record £822.5m several weeks earlier.
Nevertheless, Merian Chrysalis’s market cap now sits at £503m through a mixture of performance and share issuance with the investment trust announcing this week it would be raising a further £50m to target a new investment opportunity after an investment in Wefox left it “substantially invested”.
While Premier Miton’s investment trust rarely invests in IPOs due to its preference for discount anomalies, BMO Gam has tapped into the Mobius Investment Trust, Merian Chrysalis and Hipgnosis at launch in recent years.
Although Hewitt likes boutiques, he says it does lead to a risk that they “don’t quite have the firepower to get it across the line”. He thinks if Tellworth’s strategy was being launched by JP Morgan, Schroders, Henderson or even BMO Gam it would definitely succeed.
Nevertheless, he says even just hitting £75m would be a success. “They can always come back a year later with a C-share and get another sixty, eighty or £100m.”
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