Investment trusts raised a record amount of money in 2017 at £11.9bn, up 75% on the previous year according to research by stockbroker Numis.

The bulk of the money came from existing investment trusts issuing new shares to raise more cash, amounting to just under £8bn. The remainder predominantly came from new investment trusts floating on the stock market as a way of raising money to fund their initial investment portfolio.

Numis believes this trend will continue in 2018 with fundraising being dominated by existing investment trusts seeking new money, referred to as ‘secondary issues’ in the market.

Property, debt, infrastructure and renewable energy funds dominated secondary issuance in 2017. For example, Assura (AGR) raised £409m for property acquisitions and development opportunities; Tritax Big Box REIT (BBOX) raised £350m to expand its empire of large warehouses; and Amedeo Air Four Plus (AA4) raised £312m to buy more aircraft for leasing to major airlines.

The two biggest secondary fundraisings in 2017 were HICL Infrastructure (HICL) which raised circa £530m for new investments; and CATCo Reinsurance Opportunities (CAT) which raised approximately £522m.

NOT EASY TO LAUNCH A NEW INVESTMENT TRUST

Speaking to several industry experts, we’re told that new investment trusts only stand a chance of raising money by floating on the stock market if they invest in less liquid assets or they cover a niche part of the market.

Launching a mainstream trust that invests in liquid equities may be more of a challenge because there are already so many
open-ended funds (unit trusts and Oeics) on the market in this category competing for investors’ money, not to mention a large number of existing investment trusts doing the same.

Even specialist trusts aren’t guaranteed to get their IPO (initial public offering) away. Just look at Aviva Investors Secure Income REIT, Tri-Pillar Infastructure Fund and Greensphere Capital – all of whom delayed their stock market listings in late 2017 for various reasons including insufficient demand and giving potential investors more time to undertake due diligence.

‘Although the number of (investment trust) IPOs picked up in 2017, many of the issues failed to reach their fund raising targets,’ says Numis.

‘It remains far tougher to launch a new investment trust than to raise secondary capital for existing funds. This is because there are a relatively limited number of institutions that are able to cornerstone the launch of a new issue.

‘The major multi-asset investors appreciate the benefits of the closed-end structure in specialist asset classes. However, they are wary of illiquidity and increasingly want vehicles to be at least £200m. This is often a “tall order” at IPO stage, particularly for funds investing in asset classes that are unfamiliar to most investors.’

NEW TRUSTS MUST BE HIGHLY SKILLED AND DIFFERENT

Equity-focused investment trusts need to show specific expertise and a differentiated offering in order to capture investors’ attention when trying to raise money to float on the stock market.

Of those floating in 2017 with an equity investment mandate, most were focused on smaller companies.

Examples include Scotgems (SGEM) which is targeting small caps in emerging markets; and Aberforth Split Level Income Trust (ASIT) which is targeting small UK-quoted companies to provide shareholders with a high level of income and potentially capital growth. The teams behind both of these investment trusts have a great track record.

Next up will be asset manager JPMorgan which is seeking to float a new investment trust on 2 March called JPMorgan Multi-Asset Trust. This will be managed by a highly experienced team in the multi-asset space. It is targeting 6% total return per year including a 4% dividend yield; and it is hoping to raise in excess of £150m at float.

DANGLING THE DIVIDEND CARROT

Numis says the sweet spot for investment trusts trying to raise money via an IPO is to offer a yield of 5% or more, with a total return of 7% to 10% (being the dividend yield plus rise in the share price). It also says the ideal asset class should be one that offers some degree of inflation or interest rate protection.

‘IPOs are helped by the support of a management team with a strong track record, a seed portfolio, and a mandate that is differentiated from existing listed funds,’ says Numis. ‘Assets where the yield has some degree of government backing are also popular; for example, Triple Point Social Housing REIT (SOHO) as well as long-dated income such as long-lease property.’

European property vehicles could be a winner in 2018, according to Numis which gives the example of Aberdeen Standard European Logistics Income (ASLI) which recently joined the stock market. (DC)

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