The prospects for investment company fundraising in H2 2016

Will the second half of the year see a dip in the number of investment companies coming to the market to raise money? That seems a likely prospect given the uncertainties of the economic and investment environment in the wake of the Brexit vote – it’s not easy to persuade people to sign up to new ideas at the best of times, let alone in such a volatile environment.

This is not to say, however, that fundraising is going to dry up altogether. It may well be that very few brand new closed-ended funds hit the fundraising trail, but secondary fundraisings should be easier to get away – particularly in sectors where it is clear that there is still healthy demand from investors and advisers.

In fact, even before the Brexit vote, investment companies were raising less money. Data from Winterflood Investment Trusts shows that over the first half of the year as a whole, the sector raised £2.07bn of new money; that compared to £4,382 during the first six months of 2015. Moreover, there was just one new issue in the first half – the £80m IPO of Hadrian’s Wall Secured Investments – compared to 11 in the same period of last year. Most of the money raised in the sector came from secondary issues.

“We suspect that fundraising conditions will deteriorate in the short term due to the uncertainty generated by the Brexit verdict,” Winterflood’s investment company analyst team says. But it also points out that investor appetite remains in certain key areas. In particular, “the demand for income, which has driven so much of recent issuance is unlikely to disappear, particularly as the Governor of the Bank of England has suggested that interest rates might be lowered over the next few months.”

The breakdown of the first-half data underlines the importance of the income theme. Some 41 per cent of the money raised was picked up by infrastructure funds offering investors attractive yields, while a further 29 per cent went into the property sector, where yield is also a clear attraction.

As Winterflood points out, there is every reason to expect income to become even tougher to find in the months ahead. We have already seen, in the wake of Brexit, Royal Bank of Scotland warning that it may charge some customers for holding their money on deposit if interest rates slip into negative territory.

The investment companies sector represents a good option for advisers and investors planning for such difficulties. It offers access to illiquid asset classes that throw off good levels of income but are impractical to hold directly for most investors – including infrastructure and debt. Uniquely, investment companies are allowed to build up dividend reserve funds, keeping back some of the income they earn in good years in order to support dividends to their own shareholders when times are tougher. As a result, many funds have been able to offer a smooth curve of rising dividends even during periods of market volatility.

In this context, expect to see further secondary issues during the rest of the year, even if investment companies decide now is not the time for IPOs.