Demand for new investment trusts is slowing, with investors showing signs of initial public offering (IPO) “fatigue”, according to analysts.
It became increasingly difficult towards the end of 2014 to raise money from an investment trust IPO, with some companies abandoning their launch plans altogether.
Analysts from Winterflood Securities and Numis Securities have predicted that this trend could continue into 2015.
The key issue for new launches is gaining enough size initially to secure the interest of wealth managers, many of whom will not invest in a trust that is less than £100m in size.
However, in spite of the general malaise in the market for new trusts, both Winterflood and Numis have predicted there will still be demand for income-focused trusts, which have dominated the investment trust landscape in recent years.
Winterflood said in its annual review of the investment trust sector that “a number of high-profile issues were cancelled or postponed” at the end of 2014, citing Avenue Capital Credit Opportunities as a planned trust launch that was ditched.
Last year some £6.4bn was raised for investment trusts, but that was down 14 per cent compared with 2013. Only 43.9 per cent of that figure was amassed by new IPOs, the rest came from existing trusts raising more money.
Numis added that one of the major launches, Kennedy Wilson Europe Real Estate, should be discounted because of its mainly institutional shareholder base, lowering the total even further to £5.5bn.
In its predictions for the trust sector in 2015, Winterflood said that “the pace of new issues across the investment trust sector will slow” and “fundraising will be concentrated on existing funds with proven mandates and income streams”.
Numis said there were now “signs of IPO fatigue in the [investment company] market”, and that “IPOs are still far tougher than raising secondary capital for existing funds”.
The analysts argued that the issue with getting a new trust launch off the ground came from the lack of investors willing to invest from the very beginning.
It said many major fund of fund buyers were happy to buy investment trusts, but were “wary of illiquidity and increasingly want vehicles to be at least £200m” before they invest.
But Numis said raising £200m at launch was a “tall order” for a trust, especially if it was investing in niche areas of the market, which most new trusts tend to target.
It was also difficult to get big buyers interested at launch because “there is often little clarity over the size or success of a new launch until very late in the whole process”.
This meant that buyers might be unwilling to commit if they didn’t know how big the new trust would be.
However, both Numis and Winterflood said there was still likely to be demand for trusts grouped together under the term “alternative income”, such as infrastructure, property and debt.
The three alternative sectors dominated the new issuance landscape in 2014, making 77.2 per cent of all new money raised from IPOs or existing trusts, and analysts expect that trend to continue in 2015.
