HICL Infrastructure (HICL) has launched an opportunistic share issue to capture investor interest in inflation-linked funds amid signs that investment companies are struggling to raise money with a six-month ‘drought’ opening up since the last launch of a closed-end fund.

HICL taps investors

HICL, a £3.4bn operator of public sector facilities in schools, hospitals, toll roads as well as a stake in water company Affinity, is looking to issue new shares at 169p, a 3.1% discount to the closing price of 174.4p last Thursday and a 4.9% premium over the 31 March net asset value (NAV). The offer closes this Thursday.

The tap issue, which is available to private investors through the Primary Bid app, will be used to repay the £90m HICL has drawn from its overdraft and come as fund manager Infrared Capital eyes a potential pipeline of over £500m in investments in public private partnerships and electricity transmission.

HICL’s timing surprised Stifel analyst Iain Scouller, who said the offer would have been better a month ago when the shares traded above 180p. Nevertheless, he upgraded the shares to ‘hold’ from ‘sell’ with a fair value of 171p, saying, ‘we think the issue offers a reasonably priced entry point’.

Rising inflation is benefiting the company which, like many of its rivals, has revenues from running core infrastructure pegged to increases in the cost of living. It said current inflation forecasts could add another 3p to 3.6p to its 161.1p NAV per share at 31 March.

HICL shares yield 4.7% and have held steady so far this year. Over 10 years they have generated a total return of 115%.

Muted response for DGI9 and Impact 

The share issue follows a disappointing start to investment company fund raising in the second half of the year. Digital 9 Infrastructure (DGI9) last week said it raised only £60m following its £459m investment in television and radio networks provider Arqiva Group, although it did take in £95m as recently as January. 

Impact Healthcare (IHR) also last week modest uptake of its latest share offering, despite offering a yield of over 5% and inflation-linked rents, in common with most real estate investment trusts. The £473m company raised just £22.3m, although it too recently picked investors’ pocket with a £40m share issue.

Although investor sentiment is poor, appetite for renewable infrastructure funds, which benefit from both rising power prices and high inflation, is strong with Greencoat UK Wind (UKW), 3i Infrastructure (3IN), NextEnergy Solar (NESF) and SDCL Energy Efficiency Income (SEIT) all thought to be planning share issues in the near future.

Volatile stock markets, rising interest rates and the war in Ukraine proved a poor backdrop in the first half with investment company share issuance slumping to £4.3bn, down 36% from a year ago.

IPO drought 

The most notable aspect of this, said Numis Securities in a report, was the absence of new fund launches as initial public offers (IPOs) dried up. The failure of GCP Co-Living and Cordiant Global Agriculture to raise sufficient money for their IPOs and Waverton shelving plans for a multi-asset closed-end fund means the last investment company to float was ThomasLloyd Energy Impact (TLEI), which raised $115.4m (£87m) in December, less than half the $320m it originally sought. 

The six-month IPO drought is the third longest spell without a closed-end fund flotation this century, according to the broker, behind the 10-month freeze in the 2008/09 great financial crisis (GFC) and the eight-month closure of capital markets during the 2020 pandemic.

‘We think it is a possibility that there will be no IPOs during the whole year. If so, it would be highly unusual and would compare to an annual average of over 14 IPOs per year in the period since the GFC. We would not be surprised if something gets away towards the end of the year, but it is currently unclear what that might be,’ although it suggested the need for companies to raise capital cold provide opportunities for good investment managers to launch funds in biotech and private assets.

Numis added: ‘There are always a few in test marketing, but we have the feeling that most at the moment are very early stage and rather speculative. As a result, we do not expect the same sort of flurry as we saw in late 2020/early2021 as we emerged from Covid lockdowns.’

‘Alternatives’ dominate

Secondary share issuance by investment companies grew 17% in the second quarter, compared to the first three months of the year, but fell 18% on a year ago.

Once again, funds investing in ‘alternative’ asset classes outside equities, or shares, generated the bulk of this: a total of £3.1bn or 72% of the first half total, although this was a 27% decline from £4.3bn in the first half of 2021.

The crises in climate change, energy and inflation fuelled huge demand for renewable funds which raised £1.3bn with Renewables Infrastructure Group, or TRIG (£280m), Greencoat Renewables, or GRP (*235m) and Bluefield Solar Income, or BSIF (£150m) leading the way. 

At the end of June VH Global Sustainable Energy (GSEO) did well to attract £122m for investments in energy transition.

Volatile power prices also helped battery funds with Gore Street (GSF) and Gresham House (GRID) energy storage funds both raising £150m after reporting a spike in trading revenues.

International Public Partnership (INPP), a HICL rival offering 70% inflation protection, scored the biggest success, raising £325m in a heavily oversubscribed issue.

Specialist index-linked property funds also did well with second-placed Supermarket Income (SUPR) drawing in £308m, LXI raising £250m before its merger with long-lease rival Secure Income, and Home Reit (HOME) which took in £150m.

Defensives a big draw

Defensive multi-asset funds also proved popular as investors looked for safe havens. Ruffer (RICA) took in £236m followed by Capital Gearing (CGT) on £217m and Personal Assets (PNL) on £118m. Including £137m from hedge fund BH Macro (BHMG), wealth preservation funds accounted for 13% of the total raised by investment companies in the first half. This represented nearly half (48%) of the money raised by equity funds in the first six months of the year.

Other popular equity trusts that got a look in included Smithson (SSON), the Fundsmith global madcap fund, which issued £93m of shares in the first quarter but none in the second quarter as its stock fell to a discount to NAV, preventing further issuance. 

Similarly, Alex Wright’s UK equity fund Fidelity Special Values (FSV) issued £27.8m in the first quarter but just £1m in the following three months as its derated to a 3% discount. 

Polar Capital Global Financials (PCFT) was a top issuer in the first quarter when it raised £86.2m but nothing in the following quarter when the shares fell to 10% discount.

The hectic pace of share issuance by trusts in the Baillie Gifford growth stable virtually ground to a halt with global equity fund Scottish American (SAIN) the only one to issue just £2.9m in shares.

UK equity trusts with a ‘value’ investment style were more in demand, however, with City of London (CTY) attracting £44m, Merchants (MRCH) £53m and Law Debenture (LWDB) £30m.

Going in the opposite direction, a total of £1.7bn of capital was returned by investment companies to shareholders. Most, £1.2bn, came in the form of share buybacks as trust such as Scottish Mortgage (SMT), Monks (MNKS), Alliance (ATST) and Polar Capital Technology (PCFT) battled to prevent their shares falling to a wide discount as investor demand fell away.