A welcome revival of a long dormant structure

It is no secret that the UK investment companies market has been shrinking for the past three years, with new capital raising proving difficult – if not impossible – in most cases. However, news of a Seraphim C share issue is injecting life into the investment companies sector.

A series of headwinds has weighed on the sector. Regulatory changes, particularly around cost disclosure, complicated how investment trusts are presented and distributed. This proved especially challenging for wealth managers – historically a key source of demand – contributing to prolonged outflows and wider discounts that effectively shut the door on new issuance for traditional equity trusts.

At the same time, the sector’s primary growth engine over the previous decade – alternative assets such as infrastructure, renewables and private markets – stalled. The sharp rise in inflation and interest rates from 2022 undermined their appeal to income investors, choking off fresh capital.

One consequence has been the near absence of meaningful C-share issuance. The now-defunct Harmony Energy Income Trust raised £15.5m in late 2022, but prior to that the last significant raise was the Schiehallion C share, which raised around £500m in April 2021.

That may now be changing. On 16 April, Seraphim Space Investment Trust (SSIT) published a prospectus for a C-share issue of up to £350m. If successful, it would firmly put C shares back on the map. Importantly, the offer is open to both institutional investors (via a placing) and retail investors (via a Retail Book offer). With C shares returning after a long absence, it is worth revisiting how the structure works – and why it makes sense here.

A structure designed around fairness

C shares are not new, nor especially complex. They are essentially a temporary share class that allows an investment trust to raise capital without disadvantaging existing shareholders.

The key issue they address is cash drag. When new capital is raised, it often takes time to deploy – particularly in private markets or when large sums are involved. Holding significant cash in the interim dilutes returns, especially in rising markets where most fundraising tends to occur.

C shares sidestep this problem. New investors subscribe into a separate pool of assets, managed alongside – but distinct from – the existing portfolio. Once the new capital is substantially invested (typically 85% or more), the C shares convert into ordinary shares based on the relative NAVs of the two pools.

This ensures that capital is only merged once it is fully productive, protecting both new and existing investors. It also reduces pressure on managers to deploy capital too quickly and risk overpaying. In short, C shares are a mechanism designed around fairness.

Seraphim Space: from hype to momentum

SSIT was launched in 2021, against a backdrop of ultra-low interest rates and strong appetite for growth and venture strategies. As the world’s first listed SpaceTech fund, it attracted considerable attention.

The strategy has since evolved. While initially including early-stage venture exposure, the focus has shifted towards later-stage (Series B and beyond) investments, where business models are more proven.

Like many growth-focused strategies, SSIT was hit by the sharp rise in interest rates from 2022, which compressed valuations and pushed the shares to a persistent discount to NAV. More recently, however, sentiment has begun to improve.

SpaceTech benefits from defence tailwinds

As I discussed in the latest QuotedData note, heightened geopolitical tensions – particularly around US support for NATO and Ukraine – have exposed capability gaps and prompted European nations to increase defence spending and accelerate procurement.

This is an area where SSIT is well positioned. The growing importance of SpaceTech in defence has been reinforced by falling launch and hardware costs, which have transformed the economics of satellite deployment. Smaller, cheaper, and more capable systems mean that countries previously priced out of the market can now build their own constellations.

This trend is already evident, with countries such as Greece, Finland, Poland and Switzerland procuring satellites. SSIT’s portfolio company ICEYE is a clear beneficiary.

Portfolio momentum has also been strong. Material valuation uplifts announced so far this year include ICEYE (+34%), ALL.SPACE (+80%), D-Orbit (+23%), HawkEye360 (+15%) and Xona (+167%). These gains, combined with improving sentiment, have pushed SSIT’s shares to a significant premium – around 34% at the time of writing.

The news is coming thick and fast, only yesterday we were told that there has been a bid for ALL.SPACE.

Why a C-share issue makes sense

Against this backdrop, Seraphim’s proposed C-share issue looks sensible and well timed. The trust invests in private SpaceTech businesses, where long development timelines and staged funding rounds mean capital cannot be deployed immediately and patience is required.

SSIT’s manager highlights a deep pipeline of opportunities and expects quarter-on-quarter NAV growth as recent contract wins feed through into revenues. Furthermore, while the manager cannot be sure of the timing, he also believes that SSIT’s other portfolio companies will, in time, exhibit similar growth trajectories to ICEYE.

In this context, a C-share issue is the most appropriate structure. It allows SSIT to raise capital now while protecting existing shareholders from the impact of deployment timing and cash drag.

The fundraise should also deliver incremental benefits: improved secondary market liquidity and a lower expense ratio, as fixed costs are spread across a larger asset base and the management fee moves to a lower tier.

As highlighted above, the offer will be open to both institutional and retail investors – something not always seen in capital raisings. We welcome this as not only is it equitable, but it broadens the potential investor base. We think it may also reflect a recognition that, despite a lack of new issuance in recent years, retail investors remain a growing constituency for investment companies, particularly in more specialist sectors.