Will rule changes encourage more fund-raisings?

Should we look forward to a glut of investment company fund-raisings later this year? From this summer, a change in the rules on how closed-ended funds may issue new shares will make it simpler for funds to raise more money without incurring significant costs – that may prompt more funds to think about whether now is the right time to grow in size.

Under the current rules, investment companies are not allowed to issue new shares worth more than 10 per cent of the existing share capital (as measured by an average over the previous 12 months) without publishing a new prospectus for investors, which can often be a technical and costly process. From the summer, however, that threshold will double to 20 per cent.

The effect will be to make larger fund-raisings more cost-effective. And assuming they judge market conditions to be right for a share issue, that may persuade more investment company boards to consider launching larger issues.

There certainly seems to be an appetite for such funding rounds, with investment companies issuing substantially more stock in recent times. The sector as a whole raised £746m during the first two months of the year, a 91 per cent increase on the same period of 2016.

Some of the investment companies issuing new shares this year have been traditional closed-ended funds offering exposure to a range of stock markets – Scottish Mortgage, Personal Assets, F&C Global Smaller Companies and Finsbury Growth & Income, for example, have all sold shares on the secondary market.

Equally, however, we’re also seeing regular issues from funds that invest in alternative assets – particularly property and debt.

This makes sense. Where a fund’s investments are less liquid, it can be effective to raise cash in a series of funding rounds, as and when new assets become available, rather than operating with significant amounts of cash that has not been invested. So we’ve seen, for example, GCP Student Living raising money this year in order to acquire a central London student accommodation property, and GCP Asset Backed Income picking up cash to participate in pipeline identified by its investment manager.

Investment companies with alternative assets have been popular with advisers and investors alike in recent years, since they’ve often been the best source of good yields. Given that there is little prospect of the environment for income seekers improving any time, there’s every reason to think these funds will continue to enjoy support – there will continue to be a market for their secondary share issues.

Naturally, investors must tread carefully. When funds raise money in this way, particularly for large investments in new assets, they are to some extent being asked to put their faith in an unknown quantity, even where the fund has a good track record. Share issues by funds raising cash to increase the size of an existing portfolio – to buy more of the same – may feel more comfortable.

Nevertheless, the availability of these opportunities – particularly for income seekers – is to be welcomed. And helping funds to raise more money without subjecting existing (and new) shareholders to unnecessary costs is a good idea.