The stock exchange announcement confirming that the Liontrust ESG trust would not happen due to the inability to raise the £100m target implied demand was strong from private investors, of whom 2,000 expressed an interest, but weak from the wealth management community.
Similarly, the Tellworth British Recovery & Growth and the SDL UK Buffettology Smaller Companies trust launches were scrapped over the past year due to insufficient client demand, while a trust launch from Schroders in 2020 (Schroder British Opportunities) raised only its minimum target of £75m.
Mick Gilligan, head of managed portfolios services at Killik and Co, says consolidation in the wealth management sector in recent years has made it harder for smaller trusts to launch.
This is because as wealth management companies combine, the amounts of money managed by each business rises, and that by each individual wealth manager.
As investment trusts are listed on a stock exchange, substantial flows in and out can have a material impact on the share price at which a trust trades. If a wealth manager needs to sell a chunk of shares for some clients, this could be enough to drive the share price down, forcing losses on the clients that remain invested.
Conversely, a wealth manager may decide a trust is a good investment for a group of clients at a particular share price, but if the trust is relatively small, the act of buying the shares in the trust for the first group of clients is likely to push the share price higher for later clients, even if they are in the same portfolios.
Only trusts of a substantial size are likely to be able to provide sufficient liquidity to enable the manager of a substantial pool of assets to buy and sell in sufficient quantities, according to Gilligan.
Most trusts seek to raise a fixed amount at launch, with the intention of meeting future client demand with secondary fundraising in future.
Data from the Association of Investment Companies shows £6.3bn of new money has been raised by investment trusts in 2021 year to date, with £5.1bn of this being existing investment trusts raising new money.
Gilligan says the minimum level an investment trust needs to raise at launch now to be viable is probably £100m, having in the past been closer to £50m.
Liquidity concerns
Jason Hollands, managing director for corporate affairs at wealth manager Tilney, says: “Discretionary managers and other quasi-institutional investors are mindful of liquidity when investing in listed investment companies. No one wants to end up with a huge position in a small, thinly traded investment company that you can’t easily get out of.
"As the highly fragmented UK wealth management sector continues to consolidate, this concern about liquidity isn’t going to go away and portfolio managers also have a lot more options now with the growth of ETFs and availability of smart beta and factor funds to add to the mix.”
Simon Elliott, head of investment trust research at Winterflood Securities – the brokerage company tasked with raising the capital for the Liontrust IPO – says: “The past decade has generally been a very good one for investment trust launches.
"The challenge that is emerging is that unless one of the very big wealth managers agrees to commit £20m or £30m at launch, then the trust cannot seek to raise a big amount, and when they can only attempt to raise a small amount at launch, that makes the trust quite illiquid at launch. That means a lot of the slightly smaller wealth managers cannot buy an IPO because it is too small to be liquid."
He adds: "Liquidity is the thing they are all worried about, no one wants to be left owning a huge amount of a small trust, and not being able to sell it.”
Elliott says one substantial wealth manager whom he has spoken to says the maximum his company is allowed to own of any one fund is 3 per cent, and this rules out most investment trusts on the market.
He says those trusts that have been able to launch are generally finding it more comfortable to raise new capital in secondary fundraising at a later date, and grow their assets that way, but those seeking to launch tend to need to stand out or be part of a large institution that can absorb the costs of a trust until it becomes larger.
One trust that shows the capacity to grow in size as a result of subsequent fundraising after the IPO is Gore Street Energy Storage, which raised just £31m at IPO in May 2018, and now has assets of £279m.
Nick Britton, head of intermediary communications at the AIC, says: “The money raised through IPOs in the first half of 2021 was £1.2bn, the highest for four years. There was also £5.1bn raised by existing companies, which was an all-time record for a half-year period.
"There has been strong support for launches focused on digital and renewable energy infrastructure, making the most of investment companies’ ability to deliver attractive income through investment in less liquid assets.”
Costs
Gilligan adds that many investors are happy to wait until after a trust has launched, and then potentially buy it at a discount, rather than buy it at launch and see it move to a discount soon after.
Fees typically amounting to about 2 per cent of the amount raised are generally levied on a trust coming to market. About 1 per cent of this fee is paid to the brokers, with the rest going on fixed costs, such as the charges levied by lawyers, and by the stock exchange itself. The bulk of the costs associated with coming to market are fixed, regardless of size. Brokers would be more likely to charge a higher fee if they think a trust is more difficult to sell shares in.
The challenge for asset management companies is that with the cost of launching a new company being quite fixed, the amount they need to raise to ensure a trust is viable cannot really fall below a certain level.
Hollands adds that the ESG focus of the Liontrust offering may also be an issue. He says: “There is demand for ESG but the pace of new product proliferation in this space is running way ahead of this. Most asset managers want to park some ESG chips on their chessboard because they can see structural growth in this area, but in many cases they will have to be patient to capture flow.”
A Liontrust spokesman pointed out that on the open-ended side its ESG assets have doubled over the past year.
Charlotte Cuthbertson, who jointly runs the Miton Global Opportunities trust, a vehicle that invests in other investment trusts, says: “I think the future of investment trusts is going to be in the alternatives space.
"While many of the big wealth managers would only invest in a mainstream trust that is £500m in size, they are happy to back alternatives trusts they think are going to get bigger, and which are a smaller part of portfolios. Low bond yields mean alternative income investment trusts are particularly popular right now with wealth managers and big advisers.”
David Thorpe is special projects editor of FTAdviser
