Playing their part

Investment company fundraising is bringing a wider pool of capital into areas much in need of investment.

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Investment company fundraising is bringing a wider pool of capital into areas much in need of investment.

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The AIC’s recent announcement that investment company fundraising has already hit a record high this year is quite something. It is only October, but existing investment companies have now raised £8.71bn of new money in 2021 – eclipsing the previous record year of 2019, when the total reached £7.35bn, by some distance.

The numbers are impressive, but the more inspiring aspect of this story is the way in which the investment companies sector is acting as a conduit between investors with capital to deploy and areas of the economy that desperately need funding. It is a junction that investment companies are uniquely well-placed to broker.

Take renewable energy, for example. As the world focuses on decarbonisation, huge new investment is required in green energy technology. For investors prepared to provide that capital, there is the prospect of attractive long-term returns, as we spend more on green energy, with the added bonus of government backing for the sector in the form of subsidies, carbon taxes, and pricing underpins. But this is an illiquid market where investors must be prepared to put up large sums and commit to the long term; in theory, that puts it out of reach for most retail investors.

In practice, however, investment companies can bridge the gap. The structure of a closed-ended fund, with its stock market listing, provides daily dealing and complete liquidity for investors. The fund, meanwhile, is free to deploy large amounts of capital for the long term.

No wonder that renewable energy-focused investment companies are proving so popular. The sector leads the way on fundraising in 2021, with secondary capital of £1.7bn already in the bank.

Infrastructure is another good example of where investment companies are bringing a wider pool of capital into an area much in need of investment. As the world strives to “build back better” from the Covid-19 pandemic, it will need to invest huge sums in, for example, our transport networks, energy transmission and also in crucial new digital infrastructure.

As with green energy, the return profile on such investments looks attractive, but again, illiquidity and extended time horizons are potential barriers for retail investors. Here too, investment companies are increasingly active. The infrastructure sector of the closed-ended fund industry has already raised £988m this year.

The list goes on. Investment companies in the growth capital sector, the next most active area of the market for secondary fundraising this year, are acting as a conduit between investors and fast-growing privately owned-businesses, the potential powerhouses of the economy of tomorrow. Investing directly in such businesses simply would not be possible for large numbers of investors.

Elsewhere, property-focused investment companies have also been in demand. Real estate of all shapes and sizes provides crucial portfolio diversification for investors – crucial given the current uncertainties – but poses all sorts of problems when held direct, or via an open-ended fund.

We are also seeing the investment company structure support the development of new business models and value propositions. One of the industry’s big stories of recent years has been the success of funds such as Hipgnosis Songs, which generate returns by buying the rights to music and other intellectual property. These royalties funds have raised £306m this year for a business model that simply did not exist a decade ago.

None of this would be possible with other types of collective fund. So, while the investment companies sector will no doubt be enjoying its fundraising success this year, there also needs to be a broader celebration. Investment companies exist to serve the interests of their shareholders, who focus on income and capital gains. But thanks to its structure, the industry is able to meet that responsibility while also driving societal and economic benefit.