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Who killed Liontrust's ESG IPO?

A surprise flop offers a cautionary tale for investment trust fans
Who killed Liontrust's ESG IPO?
  • To the surprise of some, Liontrust ESG Trust has failed to meet its IPO fundraising target
  • What does this tell us about the market?

Somewhere in the investment trust world a cork is popping. Closed ended funds raised an enormous £6.3bn in the first six months of 2021, setting a new record. Some £1.2bn of this came from investment trust initial public offerings (IPOs), the highest amount raised since the first half of 2017 and in keeping with a broader mania for stockmarket flotations.

With markets riding high and investor sentiment looking resilient, there have seemingly been few better times to bring an investment trust to market. Yet of several trusts that have successfully floated this year, one name has been conspicuously absent. On 2 July it was announced that the highly anticipated Liontrust ESG Trust IPO would not go ahead after its fundraising failed to hit a £100m target.

Snatching defeat from the jaws of victory?

At a glance, this IPO seemed like Liontrust’s to lose. ESG still appears to be in extremely high demand: in the open-ended fund space, Investment Association figures show that responsible investment vehicles took in a net £5.5bn from UK investors in the first five months of 2021.

Liontrust has an established brand here. The firm’s outperforming Sustainable Investment funds accounted for more than £10bn in assets at the end of March. The mooted investment trust, which would have had similarities with the Liontrust Sustainable Future Global Growth fund (GB0030030067) but with a more concentrated portfolio, a closer focus on smaller companies and the ability to use gearing, looked set to capitalise on rampant demand for ESG investments.

Yet it seems the trust failed to sufficiently enthuse all parts of the market. A Liontrust statement noted that while nearly 2,000 individual private investors had committed to the IPO, overall demand had been insufficient – suggesting the likes of professional investors may have sat on the sidelines. Whatever the reason, the trust's disappointment can offer lessons for investment trust fans.

The problem with investment trust IPOs

In Liontrust’s statement chief executive John Ions referred to “the challenging market conditions for fundraising for investment trusts”, with some justification. It is not uncommon for IPOs to falter in the face of investor sentiment: just last year the Buffettology team failed to get a UK small cap trust off the ground despite the huge popularity of its flagship open-ended fund. Plans for another trust, Tellworth British Recovery & Growth, were also scrapped while Schroder British Opportunities (SBO) just squeaked through its own IPO.

The problems of this trio tell us something about the unloved nature of the UK market at the time, but it can also be hugely difficult to generate much enthusiasm for most equity investment trusts. Not one of the five names that floated in the first half of 2021 focused on stocks. And as the chart shows, investment trust IPOs have been dominated by “alternative” asset classes, from infrastructure to debt, unlisted stocks and even music royalties. Equity trusts are generally hard to get off the ground, even if the likes of Smithson (SSON) have notably bucked this trend. Those equity trusts that do succeed tend to be of a specialist nature, from small cap vehicles to sector and country funds.

Other theories have been offered up to explain the failure of this particular IPO. Laith Khalaf, financial analyst at AJ Bell, suggested investors may be waiting for trusts to launch on the market, and potentially move to a discount, before buying in at a lower price. “This issue is compounded by the fact that the costs of setting up investment trusts, normally in the region of 2 per cent, are generally paid as part of the IPO, giving investors another reason to wait it out," he said. 

As he observes, investors can already get their hands on other ESG trusts at seemingly cheap entry points, with Keystone Positive Change (KPC) and Jupiter Green (JGC) shares trading at discounts to net asset value (NAV) of 3.4 per cent and 7.8 per cent, respectively, on 2 July. With rivals already available, the Liontrust approach may not have seemed niche enough.

Of course, we also have another alternative option in the form of the open-ended funds already run by Liontrust’s Sustainable Investment team. While the investment team promised to take advantage of the closed ended fund structure with this new venture, the existing funds may have proved enough for some.

Whatever the specific problems behind this IPO attempt, the easier money still appears to be in the alternative space. Equity investment trusts may need to be more distinct, even when it comes to ESG.