- A trust focused on UK companies has successfully launched on the market - unlike two previous attempts this year
- However, the amount raised is well below target, and challenges do remain
- A look at what the trust does, and why UK equity trust launches have struggled
Schroders has bucked the trend of recent months by successfully launching an investment trust focused on UK companies - but failed to go beyond the lower bound of its fundraising ambitions.
Schroder British Opportunities has raised gross proceeds of £75m in its initial public offering (IPO), having sought up to £250m. The trust, whose shares are expected to start trading at the start of December with a ticker of SBO, will generally invest in a 50/50 mix of public and private equities. Its premise centres on the idea of a “once in a generation opportunity” to capitalise on future demand for capital from both listed and private businesses in the wake of the pandemic.
The trust’s successful fundraising stands out following the events of October, when IPO plans for both the Buffettology Smaller Companies Investment Trust and Tellworth British Recovery & Growth were dropped due to insufficient demand. While UK stocks might have looked extremely cheap, Brexit uncertainties and a difficult 2020 have proved off-putting for many investors. The fact that many UK equity trust shares have tended to trade at large discounts to net asset value (NAV) has not helped new entrants in this space.
The success of the Schroders trust may stem in part from its focus on private companies as well as listed stocks. Other factors are also at play: Schroders has significant resources with which to promote the trust, and had already committed to providing 10 per cent of the funds raised.
Analysts at Numis noted that the IPO had given Schroders “an opportunity to build a public/private portfolio with a clean sheet of paper”, in contrast to the Schroder UK Public Private (SUPP) trust, whose management team inherited the highly concentrated, healthcare-heavy portfolio originally assembled by Neil Woodford. Yet Numis warned that the new trust’s lead portfolio managers Rory Bateman and Tim Creed would ultimately need to win over a wider base of investors.
“The IPO just reached its minimum size of £75m, and whilst it is a good result to get an IPO away, the fund is small and will need to grow to put itself under the radar of a wider investor base,” they said.
The timing of the IPO could also prove unfortunate. Having lagged behind in recent years, the FTSE All Share has finally rallied strongly following Pfizer’s vaccine announcement on 9 November. As with other value rallies of recent years, some worry that this strong performance could quickly peter out. However, the Schroders managers have pointed to a structural trend based on UK company fundraising, rather than focusing explicitly on depressed valuations in the market.
The investment case
As Mr Creed noted, the trust will focus on “high-quality growth companies that have benefited from Covid-19 and require funding to maximise their growth potential and those that have been impacted and require equity to return to their previous growth trajectories”. He added that the team already had a pipeline of compelling investment opportunities.
As noted, the team will target a 50/50 mix of public and private equity, with some flexibility depending on liquidity considerations and the opportunity set available at the time. As part of the management process, the team will encourage the adoption of best ESG practices and disciplined capital allocation through active engagement with investees.
The team will aim for an NAV total return of 10 per cent a year once fully invested across its 50/50 target allocation. The managers will charge an ongoing fee of 0.6 per cent, with a 15 per cent performance fee on gains above the 10 per cent-mark each financial year, subject to certain criteria.