2nd July 2021
Investment trust buyers might be forgiven for reaching for the Gaviscon (other indigestion remedies are available) given the amount of new issuance that has been going on in the sector of late. There has been a steady flow of new paper all year which has ramped up materially in the last few weeks with management teams and brokers perhaps keen to get stuff done ahead of the normal summer lull. These include Initial Public Offerings (IPOs), where companies come to market for the first time, and secondary raises, where existing investment trusts seek to grow by issuing new equity.
Our experience in the sector and well established broker relationships mean we get to see most new deals that come to market. New offerings in recent years have been predominantly in the alternative space (as opposed to equities) and include nascent markets and really quite niche areas of investment. We approach potential new asset classes with an inquisitive and open mind but marry this with a healthy dose of scepticism that ensures we interrogate managers and boards on the attributes of the underlying asset class and, as importantly, the structure of the investment vehicle itself.
It’s fair to say that our hurdle for backing new IPOs has increased in recent years. This is partly because we like to see proof of concept before taking a position, with this particularly true when investing in a new asset class for the first time. We are also wary about investing in cash shells where visibility over the pace of capital deployment is unclear, as this has an inevitable knock-on impact on the trust’s short term income generating capabilities. Waiting on the side-lines and picking up stock in the secondary market or subsequent placings, allows us to build confidence in the investment thesis and to enter investments once cash is largely invested. We might miss out on early returns but we think this is a more prudent approach that protects us and our unit holders from IPOs which fail to meet expectations.
Governance is another really important factor when assessing an IPO. Are the manager and Board appropriately aligned with shareholders? Are contingent liquidity events built into the structure to allow an exit route should the trust fail to attain scale? Is the targeted raise for an appropriate amount of capital that can be quickly deployed? Is the likely shareholder register suitably diversified? Are robust discount control mechanisms enshrined to mitigate share price volatility (particularly important for trusts whose aim is to deliver stable and uncorrelated NAV returns)? The list goes on.
Assuming governance standards remain high, a buoyant new issue market is a positive for us. As many readers will know, we pride ourselves on being unconstrained and truly multi-asset investors, with the conveyor belt of new investment trust launches providing us with a host of new asset classes and opportunities to explore. This is particularly important at a time when we believe many mainstream equity and bond markets are expensive. In the past few years, the proliferation of new trusts has allowed us to gain exposure to exciting areas like song royalties, ship leasing, battery storage and digital infrastructure to name but a few. In many cases the return profile of these assets have little sensitivity to the economic cycle or other financial assets, so help hugely with portfolio diversification, whilst also delivering attractive stand-alone returns.
Whilst we always have a laser focus on ensuring new capital is raised at a level that is accretive to existing shareholders, a healthy market for secondary issuance is also a positive, helping trusts grow and achieve scale – which in turn brings clear cost and liquidity benefits. Placings also, as intimated above, give us the liquidity opportunity to establish new positions in size and at a discount to the prevailing share price. It is often possible to anticipate when an existing trust might be looking to raise capital and to optimize our entry point accordingly. Indeed, there are a couple of live examples in the Funds right now where we have deferred purchases in the secondary market and are instead participating in the placing to access shares at a lower level.
With the pace of new issuance running as hot as it is right now, it might be easy to have your head turned by all the shiny new toys coming to market. A highly selective, due diligence heavy approach is the best way of harvesting the resulting opportunities whilst also avoiding a bout of uncomfortable indigestion.
Ben Mackie – Fund Manager
This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. HA4399.