Invesco told investors on Monday evening that it is “virtually certain” that they will not receive any money when the investment trust winds up.
In spite of a three month extension from its bank to push back the repayment of its loans, the Invesco Property Income trust trust released a statement to inform investors that it did not expect to be able to repay the bank in full even if it managed to sell all of its property assets.
Invesco suffered during the financial crisis due to its high level of gearing after it took on a great deal of debt just before the collapse, and has now suspended trading of its shares on the London Stock Exchange.
Ian Sayers, director general of the Association of Investment Companies (AIC), said, “This is clearly a very difficult time for shareholders in the company. When researching investment companies, advisers need to consider the level of gearing, and the AIC has improved its gearing data so that advisers have a better understanding of how it will be used.”
The average level of gearing – the amount of a company’s debt related to its equity capital – across the industry is currently a modest 4 per cent, though it tends to be higher for property companies.
Annabel Brodie-Smith, communications director for the AIC, said, “It is obviously concerning to see this happen and we are very sympathetic to the investors. Nobody foresaw this coming, you never really can. It is considered an outlier from the rest of the industry. Though you can never say never with financial services.”
Gearing is a common way to measure a company’s financial leverage and demonstrate the extent to which its operations are funded by lenders as opposed to shareholders.
“Clearly investment companies have a have a gearing limit that should help advisers make their decisions and advise clients,” Ms Brodie-Smith said.
A number of split capital trusts collapsed in the early 2000s due to the introduction of financial gearing into the structure, as well as many split capital trusts that were cross invested in other split capital trusts.
Following an FSA investigation and paid compensation to shareholders, the listing rules for investment companies were changed so that high levels of cross investment in other investment trusts could no longer take place.
