The investment trusts most likely to disappear

Persistent discounts to net asset value (NAV) could lead to more investment trusts being acquired, wound up or merged, analysts have suggested.

The first half of the year saw a pick-up in deals involving investment trusts, particularly within the battered property sector. In May, LondonMetric (LMP) announced plans to acquire rival CT Property Trust (CTPT), while the board of Civitas Social Housing (CSH) backed a take-private offer from Hong Kong-based investor CK Asset Holdings, even though it valued the assets well below the company’s NAV.

Stifel and Numis analysts have both said that more takeover offers are to be expected in the second half of the year if discounts persist, and argued that trusts in the infrastructure and renewable energy sectors are likely candidates. 

Cheap infrastructure attractive 

As of 13 July, average discounts to NAV stood at 15.8 per cent for the renewable energy sector and at 17.6 per cent for the core infrastructure sector, according to Numis data, with both sectors being strongly impacted by the rising interest rates.

In response, various infrastructure trusts are going through strategic reviews. US Solar Fund (USF), which has been reviewing its options since late 2022, said last week that after “extensive discussions with numerous parties” it won’t be selling the company or its assets for now, blaming the negative market backdrop. The trust will need to appoint a new investment manager before April 2024, when its agreement with New Energy Solar Manager expires, and will begin share buybacks to try to appease investors.

Shares in ThomasLloyd Energy Impact Trust (TLEI) have been suspended since April due to uncertainty over the valuation of its construction assets, and the trust is facing a continuation vote. Due to its discount and size, RM Infrastructure Income (RMII) is looking at a potential exit or merger, while Aquila Energy Efficiency (AEET) is going through a managed run-off after failing a continuation vote in February.

These trusts are relatively small, but bigger players could also be impacted. Analysts pointed out that the last time infrastructure trusts traded at a discount was in early 2018, off the back of concerns over nationalisation of private public partnerships by a potential Labour government as well as the collapse of Carillion. Later that year, J Laing Infrastructure Fund was taken private by a consortium formed by infrastructure managers Equitix and Dalmore, with a £1.45bn bid that represented a significant premium to the trust’s NAV. 

“We do think that given current share prices, rising share price discounts to NAV, and the implied discount rates on the portfolios, both the infrastructure and renewables sectors are at increased risk of some predatory interest from private funds that may have significant cash to deploy in these sectors,” Stifel analysts wrote.

They added that renewable energy investments could look attractive to oil and gas companies that are being pressured by shareholders to improve their environmental credentials. The list of potential buyers also includes pension funds, many of which have been expanding their infrastructure portfolios in recent years and are keen on renewable investments – although they are also in the process of de-risking investments due to higher interest rates.

Numis analysts argued that the easiest targets may be in the energy storage area, because acquiring renewable energy and core infrastructure portfolios would also mean needing large operating teams to manage the assets. Battery storage investment trusts Gore Street Energy Storage (GSF) and Harmony Energy Income (HEIT) are both looking cheap on discounts of 23.6 per cent and 16.3 per cent, respectively. The board of asset manager Gresham House (GHE), which handles Gresham House Energy Storage (GRID), has backed a buyout offer from US investment firm Searchlight Capital Partners, at a 63-per-cent premium to the pre-offer closing price. 

Property is also a candidate for M&A activity

Aside from infrastructure, property is the obvious candidate for more M&A activity. Generalist real estate investment trust (Reit) Ediston Property Investment Company (EPIC), for example, is going through a review and said it is open to merging with another Reit. Numis analysts noted that while most of the M&A activity so far has been in the specialist property sector, the boards of small diversified property funds could be looking at the potential benefits of consolidation, such as greater liquidity and lower cost ratios.

Trusts in other sectors are also undergoing strategic reviews and manager changes. One of the biggest is Abrdn Diversified Income & Growth (ADIG), whose board announced a strategic review in June, noting that despite a steady investment performance and share buybacks, the trust has traded at a material discount for a prolonged period of time. A merger with another trust is one of the options under consideration.

Blackstone Loan Financing (BGLP) said it will put forward proposals for a managed wind-down, again citing the persistent discount to NAV, the market cap and lack of liquidity of the shares.

Fund sales and mergers are often good news for shareholders, and not necessarily bad for the sector either.  “We believe this is a healthy development for the sector with a period of consolidation to filter out lower quality or sub-scale players,” Numis analysts wrote. But they added: “That said, high-quality assets are also under threat of leaving the sector, demonstrated by Blackstone’s acquisition of Industrials REIT.”