ITs struggle to launch IPOs as year-end approaches

Most recently Greensphere Capital, which was hoping to raise up to $500m (£374.53m) to invest in sustainable infrastructure, has postponed its initial public offering (IPO), which had been scheduled to start trading on 20 December. Greensphere Capital said it "has taken the decision to postpone the initial public offering in order to accommodate its key cornerstone investors". 

The company said one large European institution couldn't meet the timescale, although has committed to the IPO, which Greensphere now hopes to do in the first quarter of 2018. Greensphere also said that there had been a delay with its application to the UK Listing Authority, meaning it had less than two weeks to market the issue, which was "not helpful" and much shorter than it had hoped for.

>One large European institution couldn’t meet the timescale, although has committed to the IPO, which Greensphere now hopes to do in the first quarter of 2018

However, Divya Seshamani, founder and chief executive officer of Greensphere, emphasised that it was a postponement rather than a cancellation because they have seen "some firm interest from institutions, which are very supportive". These include US wealth manager Capricorn Investment, which has committed $28.5m to the issue.

Greensphere will target a total return of 10 to 12 per cent a year over the long term, and a dividend of 3c per share in its first financial year, 5c in its second financial year, 6c in its third financial year and at least 6c per share thereafter.

The trust will invest in private and listed sustainable infrastructure assets diversified by geographies and in sectors such as water, energy transmission, distribution and storage, renewable energy and waste, sustainable agriculture, primarily in Organisation for Economic Co-operation and Development  (OECD) countries. 

Tri-Pillar Infrastructure Fund, meanwhile, had been hoping to raise up to £200m and start trading on 8 December, but has postponed its IPO until the new year. The trust said on 6 December that "it continues to make significant progress in securing the pipeline for its potential initial investments. In light of this… the period for receipt of commitments under the Issue has been extended".

It then said on 13 December that it "had been informed that there would be a grant of exclusivity by a vendor on a significant potential acquisition by the beginning of this week and [we] therefore extended the timetable for the fundraise accordingly. Despite the continued progress made by [its manager] CAMG LLP in developing that acquisition opportunity, due to the absence of any definitive outcome, [we have] decided to postpone any further public fundraising activity until 2018 subject to market conditions."

Tri-Pillar’s managers had said in November that they had identified a pipeline of investments worth about £500m and are in discussions for assets worth about £190m, although there are not binding contractual obligations on any of these.

The existing broad infrastructure investment trusts have proved very popular because of their attractive income streams and these have traded at premiums to net asset value (NAV), sometimes double-digit ones, enabling them to do secondary fundraisings which have had good take-up. These have tended to invest in UK private finance initiative (PFI) and private public partnership (PPP) projects, which have provided stable and low-risk returns.

But Tri-Pillar Infrastructure plans to predominantly invest continental European and North American infrastructure, focusing on assets that depend on revenues for usage and are subject to demand, and try to deliver greater value enhancement from them. It may also put up to a quarter of its assets into construction projects, which can make higher returns but are considered to be higher risk than operational assets – a reason why the existing infrastructure investment trusts typically have little exposure to these.

Tough environment

Although the IPO market has been subdued in recent months there has been a lot of secondary issuance over the fourth quarter, with almost £2.5bn raised as of 13 December, mostly from trusts in the alternative income space, according to Numis Securities.

"It is far tougher to launch a new investment company than to raise secondary capital for existing trusts," explain analysts at Numis. "This is because there are a relatively limited number of institutions that are able to cornerstone the launch of a new issue. The major multi-asset investors appreciate the benefits of the closed-end structure in specialist asset classes. However, they are wary of illiquidity and increasingly want vehicles to be at least £200m. This is often a tall order at IPO stage, particularly for funds investing in asset classes that are unfamiliar to most investors.

"The other key buyers of IPOs have been the private client stockbrokers. However, these are typically wary of investing in smaller issues, and it is often hard to get firm commitments of interest in advance due to the number of decision-makers involved. This means that there is often little clarity over the size or success of a new launch until very late in the process."

However, over the course of this year there have been 20 investment trust IPOs, which have raised gross proceeds of over £3.6bn, eight of which took place during the third quarter. 

Investment trust IPOs in 2017

Source: Numis Securities Research, Investors Chronicle as at 20 December 2017

A number of these had a property focus on assets such as social housing residential properties, supermarkets, warehouses and long-lease buildings with a leisure use, for example hotels, restaurants and water parks. Most of these trusts are aiming for a minimum yield of 5 per cent on full investment and some are seeking to grow dividends with inflation.

In 2016 there were only six IPOs – lower than in any year in recent history. "A period of volatile debt/equity markets at the start of 2016 was followed by an unwillingness by investors to make decisions around the Brexit vote," say analysts at Numis.

Number of investment trust IPOs by year

Source: Numis Securities Research, Investors Chronicle as at 20 December 2017

Other issues that have failed to launch

Aviva Investors Secure Income REIT was hoping to raise up to £200m in early December to invest in high-quality, long-lease commercial real estate in the UK. It was targeting a dividend yield of 5 per cent a year by reference to its issue price, which it aimed to increase broadly in line with inflation, paying dividends on a quarterly basis. And it was targeting a total return of 7 per cent a year over the medium term.

But despite its attractive income profile it did not proceed due to insufficient demand. Aviva Investors said it would "give consideration to reactivating the proposed IPO at a later date. We continue to believe in the appeal of this asset class and remain open to the options before us as we continue to monitor market conditions. We will continue to build the business in the private markets, as we have done successfully to date."

The trust's manager, Aviva Investors Global Services, is the largest manager of UK commercial real estate assets, with £24bn under management as at 30 September. It had identified an initial target portfolio of £85m, comprising four assets under exclusivity, with a follow-on pipeline of £400m.

M7 Multi-Let REIT had been seeking between £150m and £300m to invest in a portfolio of UK commercial real estate, and to start trading on 13 November. But after extending the deadline to 24 November, the company announced on that day that it had cancelled the IPO, although “may revisit a potential listing over the coming 12 months”.

M7 Multi-Let REIT had a seed portfolio including regional light industrial, office and retail assets. It was targeting an annual dividend yield of 6.5 per cent and total return of 10 per cent.

"Had it been successful, this would have been the ninth property IPO in 2017," commented analysts at Numis. "It was targeting the highest dividend yield of the new batch of companies and proposing an innovative management fee, although this was not sufficient to capture investor demand."

In October, The People's Trust, which had been hoping to raise between £50m and £125m, pulled its IPO due to not being able to raise a sufficient level of capital. This trust was being launched by former Investment Association head Daniel Godfrey and would have predominantly invested in equities via a multi-manager approach, whereby stock selection is outsourced to external managers. Analysts said the failure to raise its minimum £50m target may have been because The People's Trust was giving the external managers seven-year contracts with the aim of allowing them to focus on long-term, sustainable wealth creation. But this could have meant that investors were stuck with an underperforming manager for a long time.

It was also using the same investment adviser – Willis Towers Watson – as Alliance Trust (ATST). "We do not believe that The People's Trust was sufficiently differentiated from existing options to attract interest from institutional investors," said analysts at Numis. "They already have the choice of two large multi-manager investment trusts – Alliance Trust and Witan (WTAN)."

Both of these have lower ongoing charges than the 1.07 per cent projected cost of The People's Trust.

Investment trust IPOs that have failed to come to market earlier this year include Hipgnosis Songs Fund, which had been seeking £200m in August to invest in a portfolio of songs and associated royalties. And Pennant Park Income Trust tried to raise £150m in July to make loans to US private mid-market companies.

The ones that got away

Earlier this month Aberdeen Standard European Logistics Income (ASLI) raised £187.5m, albeit short of its £250m target, and started trading on 15 December. It will invest in high-quality European logistics real estate such as warehouses and is the first UK listed fund focused on this area.

It is targeting an annual dividend yield of 5.5 per cent on its initial share price and a total return of 7.5 per cent, in euro terms, although its quarterly dividends will be paid in sterling. In its first year to 31 December 2018 it is aiming for a dividend of at least 3p.

Aberdeen Standard Investments says investors put their money into the trust because they like logistics as an asset. Its team, which already manages European logistics real estate worth €2.6bn, is experienced. Continental European logistics assets can offer higher yields than those in the UK and a significant premium over the financing costs, with long inflation-linked and fixed-uplift leases. Drivers of this sector include the rapid growth of ecommerce, and although European online retail penetration rates are lower than in the UK they are accelerating rapidly.

"The European logistics market is already sizeable, but developing fast as e-commerce expands over the next three years, outpacing the UK and creating demand for new large distribution warehouses across the region," says Andy Allen, global head of real estate investment research at Aberdeen Standard. "At the same time, as population growth rates rise in key European cities, competition for land intensifies – prompting a race for space, particularly for last-mile delivery on the outskirts of towns and cities. The new trust will exploit this supply-demand imbalance in the sector, as we believe this will support rental income and fuel growth."

He says that transactions in the European logistics real estate market are worth between €20bn (£17.71bn) and €25bn a year, and that they have a pipeline of more than 30 potential investments worth over £1bn. Two of these, located in Germany and Denmark, and worth about €65m, are expected to complete in the new year. Mr Allen adds that they are at an advanced stage regarding the acquisitions of another eight worth around €350m, and hope to invest the IPO proceeds within 12 months.

The trust will take on leverage (debt) of about 30 per cent so, together with the proceeds of its IPO, will have nearly £250m to invest. It is looking to put this into 10 to 15 assets. "With logistics leases you often find that such is demand for buildings that tenants will sign long leases of 10 to 20 years," says Mr Allen. "And if it involves a good tenant then banks are keen to lend, so the cost of leverage can be low."

The other jurisdictions the trust initially expects to have investments in are Sweden, Finland, the Netherlands and France. Aberdeen Standard has 23 transaction managers across Europe looking for potential investments.

"Germany is the biggest economy in Europe and, while some parts are aggressively priced, you can find competitive prices," says Mr Allen. "The Netherlands, meanwhile, is a very big logistics market."

However, as the majority of Aberdeen Standard European Logistics Income's assets will be invested in Europe, analysts at Winterflood say investors should be cognisant of the potential for foreign exchange movements to impact on the trust's sterling returns.

Aberdeen Standard European Logistics Income will charge 0.95 per cent on its NAV up to €500m, 0.75 per cent on that between €500m and €1.25bn, and 0.6 per cent on that above €1.25bn. It will not charge for initial uninvested cash until the trust is 75 per cent invested.

Aberdeen Standard estimates that the trust's ongoing charge will be around 1.4 per cent to 1.5 per cent, and that this should reduce as the trust grows.

Tufton Oceanic Assets (SHIP) has raised $91m, slightly lower than its $100m target, and began trading on the Specialist Fund Segment of the London Stock Exchange on 20 December. The trust is targeting a 12 per cent a year NAV return with a cash distribution of 5 per cent in its first year and 7 per cent thereafter. It will invest in second-hand commercial sea-going vessels spread across the core segments of shipping.

"There is currently an attractive opportunity in shipping to buy assets at a significant discount to their depreciated replacement cost and lock in long-term employment producing mid-teen cash yields," says Andrew Hampson, head of asset-backed investments at the trust's manager, Tufton Oceanic. "This is a strategy we've been following with success for the past couple of years and see limited competition due to the lack of capital currently being invested in shipping."

Tufton Oceanic has invested over $1bn in shipping assets over the past few years.