It could be a red flag as history implies potential market underperformance

A little known share class called conversion, or ‘C’, shares recently had a moment in the sun when music rights investor Hipgnosis Songs Fund (SONG) issued them as a way to raise new cash.

The investment trust, newly promoted to the FTSE 250, raised £231m in a C share issue so it could buy more song catalogues.

It became the latest of in a number of trusts, usually those investing in alternative asset classes other than shares or bonds, to issue C shares as a way of raising money.

C shares aren’t always good news as we discuss later. First, it’s worth understanding how they work.


Investment trusts have a fixed number of shares in issue and are known as closed-ended funds. When someone wants to invest, they buy the shares from another investor – unlike open-ended funds which issue new units to investors, or redeems them if someone wants to get out.

The closed-ended funds structure doesn’t stop investment trusts from getting additional money to invest. They simply need to get permission from shareholders to issue new stock, sometimes done via C shares.

The proceeds from issuing C shares are typically held in a separate pool on a temporary basis, with the money invested in whatever assets the investment manager is targeting, e.g. a renewable energy trust buying solar or wind farms.


According to the Association of Investment Companies (AIC), the advantage of C shares is that existing shareholders don’t have to partake in the C share offer if they don’t want to, they don’t bear any of the issue costs, and they don’t have their returns affected while they wait for the proceeds of the C share offer to be invested.

This is because they avoid a cash drag. Often it takes time for the managers to deploy the new money, and during that period all that cash sitting in the portfolio wont generate decent returns, hence the term ‘cash drag’.

C shares are initially traded separately from the ordinary shares and the cash is invested in a separate portfolio of investments, so there is no cash drag for the former.

The C shares will convert to ordinary shares when either a predetermined level of investment is achieved or on a predetermined date.

When recently announcing its conversion of C shares into ordinary shares, Hipgnosis Songs Fund calculated a conversion ratio at 0.9796 ordinary shares for each C share, meaning shareholders will receive 979 new ordinary shares for every 1,000 C shares held.


While C share portfolios will normally be merged back into the ordinary share portfolio, occasionally this might not happen if the investment manager runs into problems.

This has been the case with SQN Asset Finance (SQN), which has suffered from damaging write-downs on loans to anaerobic digestion plants, and is also chasing around £25m it is owed from US-based solar panel manufacturer Suniva.

About three years ago it raised £134m in a separate pool of money – the C shares – which have no exposure to the troublesome anaerobic digestion investments.

Ordinarily this C share portfolio would’ve long been converted back into the ordinary SQN portfolio. But Stifel analyst Anthony Stern explains: ‘Normally, once a C share fund is fully invested, the C share is converted in ordinary shares based on a ratio based on their value. This did not happen with SQN as some of the major investments in the ordinary share portfolio have run into issues.

‘Given the portfolio of the ordinary shares has a number of significant problems such as anaerobic digestion plants and Suniva, no conversion is expected until these are all resolved and by then more issues could have emerged in either portfolio.’


Though it’s by no means always the case, it’s worth highlighting that quite a few trusts to have issued C shares have run into trouble. Is this just a coincidence or should C shares be a red flag to avoid certain trusts? It’s certainly something to consider.

After all, trusts raising new money essentially have money burning a hole in their pocket, itching to be spent. There is a risk they could chase lower quality investments because they are under pressure to invest the cash, and that could result in inferior returns for investors.

CATCo Reinsurance Opportunities (CAT), which looks for income through a portfolio of global catastrophic reinsurance risk protections, has issued C shares three times in the past decade. Its total return over the past three years is -75.8% for the ordinary shares and -55.2% for the C shares, according to SharePad.

Two other beleaguered trusts, Hadrian’s Wall Secured Investments (HWSL) and P2P Global Investments, now called Pollen Street Secured Lending (PSSL), have also issued C shares and have subsequently delivered poor returns for investors.

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