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The injustice of investment trust share placings

Investment trusts raised record sums in secondary share placings last year and 2022 has shown no sign of losing pace, with Cordiant Digital Infrastructure (CORD) and Digital 9 Infrastructure (DGI9) already tapping investors for more cash. The bad news is that private investors can’t take part. 

This matters, because institutional investors are getting a better deal. Cordiant’s shares are being placed at 106p per share. The shares were trading at 108p on Monday – nearly 2 per cent higher than the placing price. Digital 9 Infrastructure is issuing shares at 108p, compared with a trading value of 109p on Monday.

The good news for prospective investors is that the share issuances have lowered the market price relative to what's in the portfolios, as both trusts had traded at double digit premia to assets. But it doesn’t feel fair that private investors are excluded from the discounted offering. What’s more, buying newly issued stock, for example, via a placing, does not normally incur stamp duty – unlike buying shares on exchange.

Both of the digital trusts are listed on the Specialist Funds Segment (SFS) of the London Stock Exchange, as are other popular trusts such as Schiehallion Fund (MNTN), Gresham House Energy Storage Fund (GRID) and Round Hill Music Royalty Fund (RHM). The SFS is designed for “institutional, professional, professionally advised and knowledgeable investors”, which in practice means that most of these trusts can be bought on exchange via the major platforms if you complete a quick appropriateness assessment. Most platforms will not allow participation in initial public offerings or subsequent offers though. Hargreaves Lansdown's customers can in some circumstances provided they call up, complete a complex product test and place the order over the phone.

Obstacles to participation in secondary fundraisings exist beyond the SFS, however. There are multiple ways trusts can to raise capital, with the majority of those listed on the main market, including BBGI Global Infrastructure (BBGI) and International Public Partnerships (INPP), raising money via a placing rather than a public offer or offer for subscription last year. 

Under the current prospectus rules, private investors can’t access share placings but only share offers, which require a fresh prospectus, making them a more onerous way for trusts to raise money. The last time that INPP carried out a capital raise that allowed private investor access was in 2017, says Mick Gilligan, partner at Killik & Co. The prospectus that was required to facilitate this capital raise ran to 248 pages. 

“One of the unintended consequences of the existing prospectus requirements is that [private] investors, whilst not being permitted to buy stock via the placing, are permitted to buy the same piece of paper (ie, the same transferable security conferring identical economic entitlements) in the open market,” Gilligan says. 

Fortunately, the government is looking at how to improve secondary fund raisings. Freshfields lawyer Mark Austin is in the process of carrying out the UK Secondary Capital Raising Review and is due to publish recommendations on how to improve the process this spring.

The Association of Investment Companies participated in the review, proposing that once a company has been admitted to trading on a regulated market, the issuer should be allowed to make offers to the public without the obligation to publish a prospectus. The AIC wants this exemption set out in legislation.

“We think it makes absolutely no sense that an investor can buy shares in a company through the stock market using publicly available information but, when identical shares are issued by the very same company, it requires a hugely complex and expensive new prospectus,” says Annabel Brodie-Smith, director of communications at the AIC.   

“This creates substantial costs on the company, acts as a disincentive to retail investor participation in share offers and adds nothing to the information available to investors given identical shares are already traded.”