M&G Investments considering a re-entry to the investment trust market with a listed diversifed debt fund.
M&G is looking to re-enter the investment trust market with a listed diversifed debt fund.
According to marketing literature seen by Citywire, the fund manager hopes to raise £250 million for the M&G Credit Income investment trust which will be able to hold public and private debt.
Aimed at income investors the fund will eventually aim to pay 4% over three-month Libor in dividends. With the inter-bank lending benchmark currently at 0.8% that would give a yield of nearly 5%, although the initial target will be lower at 2.5% over Libor.
The asset manager is assessing wealth manager interest in the fund and is yet to confirm a flotation date.
If an initial public offer (IPO) goes ahead it would represent a return to the investment trust arena for M&G following the wind-up of its High Income trust last year.
It also signals the current strength of the IPO market with a diverse range of fund managers lining up to float investment companies on the London Stock Exchange. These include Mark Mobius, Terry Smith and Chris Mills who respectively plan to launch funds investing in emerging markets, global smaller companies and affordable housing.
Drawing on its expertise in the private debt market, M&G plans to invest a minimum of 70% of assets in investment grade debt, with the majority of the portfolio in sterling-denominated assets. The team will take a bottom-up approach and is likely to hold a significant portion of the portfolio in private and illiquid assets.
Aside from listed bonds and asset-backed securities, the team can invest in commercial mortgages, illiquid asset-backed securities and public bonds, private placements and direct lending. They can also hold infrastructure debt, structured credit, high yield corporate bonds, distressed debt and subordinated debt.
M&G believes the time could be right to consider private and illiquid assets, as interest rates rise. The new investment trust aims to lower interest rate risk and offer diversification across the credit market.
The management fee will total 0.7% per annum of net asset value (NAV), discounted to 0.5% during the initial period. Gearing of up to 30% of net asset value can be employed, but M&G does not intend to push borrowing beyond 20%.
M&G’s track record in the private debt market started in 1997 - and today the firm is the largest private debt investor in Europe. At the end of 2017, the asset manager had £35.6 billion invested in this space. M&G has a significant credit research team, which focuses on sourcing, structuring and investing in a range of private and illiquid parts of the credit market.
The launch would face stiff competition from existing diversified debt investment companies which offer yields of 5%-7%. Arch-rivals Invesco Perpetual and Henderson already offer City Merchants High Yield (CMHY), Invesco Perpetual Enhanced Income (IPE) and Henderson Diversified Income (HDIV) with CQS New City High Yield (NCYF) and TwentyFour Select Monthly Income (SMIF) from independent debt specialists also well regarded.
M&G Investments had £281 billion under management last year. It is being spun off and listed separately from the insurance business of its parent Prudential (PRU).
A spokeswoman for M&G commented: 'We don’t comment on speculation but we regularly consult with clients about new investment ideas.'