Raising the bar

The investment companies sector excels at spotting gaps in the market. From listed private equity funds to infrastructure trusts, investment companies have a long and proud history of opening up new areas of opportunity – even completely new asset classes – to a broader base of investors.

However, not every new launch brings something entirely new. And the downside of such a record of innovation is that it is often more difficult to win support for new ventures that broaden the market rather than deepen it. That has certainly been the experience in recent weeks of the Buffettology Smaller Companies fund and Tellworth British Recovery & Growth, two launches that were cancelled after failing to attract sufficient investor demand.

Both funds seemed to offer an attractive proposition and would have been managed by teams with excellent credentials. However, investors appeared to take the view that there were already a sufficient number of strong funds offering this type of exposure to the UK stock market. It didn’t help that the volatility of recent months has seen the share prices of some of these existing funds slip to wider discounts to the value of the underlying assets; why buy a new fund with no discount when proven funds are available on the cheap?

However, it would be wrong to see the failure of these two new issues as somehow implying that it isn’t possible for investment companies to raise money in the current environment. In fact, investment companies picked up £630m of new capital over the third quarter of the year according to Quoted Data – nearly twice as much as in the pandemic-blighted second quarter. The final quarter of the year has started strongly too – not least with the launch of Home REIT, a £240m new investment company that once again underlines the innovative prowess of the sector, offering investors the opportunity to participate in building accommodation for the homeless.

Indeed, many of the most successful fund-raisings of recent months have also been in areas that investors are attracted to but find it difficult to access. For example, Greencoat UK Wind, one of the few opportunities for private investors in the UK to put money directly and precisely into this form of renewable energy, raised £400m. The Hipgnosis Songs fund, which earns returns from song-writing royalties also benefitted from strong investor appetite.

The latest example is the announcement by Augmentum Fintech that it is seeking to raise £28m to add to its holdings in early-stage financial technology companies. This is yet another example of an investment company that offers something different – and an opportunity that private investors can’t easily find elsewhere to specialise in an area of the market.

None of which is to suggest there will be no more launches of new investment companies in traditional sectors and asset classes. Management teams with a strong pedigree will continue to attract interest; for example, the Smithson Investment Trust, run by the same team as the much-followed open-ended Fundsmith Equity Fund, raised £100m over the third quarter in a sector where there are a number of attractive options.

In the current environment, however, it will take something special to capture investors’ attention in sectors that are already well catered for. And the broader picture over the longer term is that brand new investment companies do seem to stand a better chance of a successful IPO when they’re offering something genuinely new.

With any fundraising, whether primary or secondary, investors and their advisers are naturally free to reach their own decisions on whether to participate. But irrespective of whether they do so, it is important that investment companies continue to focus on innovation and market access. Investors will continue to need new opportunities for diversification and tailored return profiles; time and again it is the investment companies sector that rises to the challenge.