A record year for investment company share issues

Investment companies have been in vogue this year. In 2015 to the beginning of September the net amount of money raised was a record £3.9 billion, higher than every previous calendar year. Despite August’s market volatility due to concern over China, the average investment company discount (difference between the share price and the Net Asset Value expressed as a percentage) at the end of August was 2.9%.  This is very close to the all-time low of 2.4% at the end of June indicating that there is still strong demand for investment company shares.

So why is it a record year for net money raised? Well £5.4 billion of money entered the sector through new issues (initial public offerings).  The biggest and most high profile launch was Woodford Patient Capital, which raised £800 million, the largest UK domiciled investment company IPO ever.  The company invests in a diversified portfolio of listed and unquoted early stage growth companies aiming to achieve long-term capital growth. There has been a lot of demand for the company since its launch so the board have decided to issue new shares and an additional £30 million of shares have been issued.

Most of the money raised this year has been in alternative asset classes like specialist debt and infrastructure.  These types of assets are illiquid, namely they can’t be sold at short notice, and so are particularly suited to the closed-ended structure of investment companies. The majority generate a significant income in the mid to high single digits which is an important reason contributing to their popularity. They are also highly rated by the market, with the Infrastructure sector trading at a 9% premium to its net asset value, the Property Direct: UK sector trading at a 5% premium and the Sector Specialist Debt sector trading close to asset value. Big new issues this year include UK Mortgages by TwentyFour Asset Management (£250m), private equity investment company, Apax Global Alpha (£218m) and Sequoia Economic Infrastructure (£150m).

Within the AIC’s Sector Specialist: Debt sector, investment companies investing in peer to peer lending have proved popular. P2P Global investments has raised £650 million through two C share issues this year and the new issue, VPC Speciality Lending Investments raised £200 million in March and is currently raising more money.  To explain, a C (‘Conversion’) share issue helps an investment company grow in a way that protects the interests of existing ordinary shareholders. When an investment company wants to grow, it may issue C shares. These shares and the proceeds are held in a separate pool and invested in a portfolio of assets. After a certain period, or when the pool of new money is fully invested, the two portfolios are merged and the C shares are exchanged for ordinary shares.    

However, there are also plenty of long-established investment companies investing in equities which have been issuing shares due to steady demand for the company.  These include Finsbury Growth & Income and City of London from the UK Equity Income sector.  City of London has an impressive 49-year record of consecutively increasing its dividend and is taking advantage of the investment company structure.   This allows investment companies to retain up to 15% of their income they receive each year in their revenue reserves.  When times are tough these companies can use their revenue reserves to continue to boost their dividends.  Other investment companies, such as Scottish Mortgage and Witan from the Global sector, have also been steadily raising money and these both also have impressive long-term records of increasing their dividends.

Of course August is just one month, and it’s worth remembering that popular investment sectors can swiftly fall out of favour. As ever investors need to take a long-term view and have a balanced, diversified portfolio, to prepare for times ahead. Record net fund raising level, and discounts remaining relatively narrow, indicates that demand for the investment company sector remains strong with the sector continuing to appeal to investors with new investment opportunities.  Ultimately we’ll have to wait and see what future markets have in store but there are plenty of reasons to remain optimistic about the sector.