During what has been a highly eventful year in wider equity and bond markets, London listed investment companies delivered a positive share price return to shareholders of 1.3%, this compares with losses of 6% for the wider FTSE All-Share.
Nineteen IPOs were successful in the sector, including a good mix of both equity and alternative products.
This combination of equity and alternative products was a marked departure from the primary markets in 2017 which were overwhelmingly dominated by alternative investments, especially property. Although debt primary offerings remained relatively strong in 2018, property saw a marked reduction. This contraction was replaced by a surge in the scale of equity product capital raises.
The charts below show the sector IPO compositions in 2017 and 2018. (A full breakdown of the successful IPO offerings within the these charts is given at the end of this article.)
However, alternative offerings continued to dominate the secondary fundraising activities which took £3.3bn of the total £4.8bn raised. This secondary fundraising was fairly diversified within key sub-sectors, with infrastructure (£758m), debt (£657m) and property specialist (£654m) all raising substantial sums.
Buchanan advised BioPharma Credit through its fundraising activities in 2018 when the company raised a combined total of £349m, the largest of any individual investment company in the secondary markets.
Meanwhile, a total of 37 investment companies reduced their fee structures in 2018, a significant increase on the 27 who opted to do so in 2017, reflecting the increasing momentum in investment company cost-cutting strategies.
The leading sub-sectors for shareholder returns tended to gravitate towards more specialist alternatives in what was a comparatively stormy year for a number of equity strategy investment companies. For instance, Leasing funds contributed shareholder returns of 11.15%, Infrastructure 9.54% and Renewables 8.18% (the second, third and fourth best performing sectors respectively). The crown for shareholder returns, however, belonged to the Biotechnology & Healthcare sub-sector delivering an impressive 16.85% in an at times troubled wider environment.
Looking ahead to 2019, several Buchanan clients participated in a recent AIC poll and gave their views on their outlook for markets and the wider sector in the new year:
Dion Di Miceli, head of investment companies at Gravis Capital Management said: “We are living through turbulent times with huge uncertainty hanging over the political and economic world. Future developments are only likely to increase investor angst over the coming months and years, leaving many searching for fresh ideas that offer non-correlated investments with stable, dependable returns. At Gravis we believe the investment company structure offers investors access to areas such as infrastructure projects and asset-backed finance, diversifying their portfolio whilst not risking returns.”
Dean Orrico, president of Middlefield International Limited, investment advisor to Middlefield Canadian Income said: “We seem to be entering a period of more modest growth and portfolios should be positioned accordingly. Becoming more defensive by focusing on equity income, real estate, healthcare and energy pipelines is preferable. Central banks globally should consider becoming more dovish so as not to exacerbate the slowdown.”
Pedro Gonzalez de Cosio, CEO of Pharmakon Advisors, investment manager of BioPharma Credit said: “With the outlook for global equity markets increasingly difficult to predict, we believe that investors will appreciate the value of fully-covered income producing assets and alternatives that are uncorrelated to equity price movements. Thankfully, the investment company universe is highly varied and offers a wide variety of high yielding alternative income investments. In general, we expect the more specialist of these vehicles with differentiated investment strategies to have the potential for greater distribution of returns.”
Dawn Kendall, managing director at SQN Asset Management, investment adviser to SQN Secured Income Fund said: “Despite wider concerns regarding the style of presidency and the rise of populism globally, business data from the US remains good and the risks to economic development remain benign. The outlook for Europe is less certain and focus will be on financial institutions and their ability to sustain a downturn. In the medium term, reform of core institutions in this region will be key. Further afield, the lead will be taken from America and will be determined by trade and dollar strength. These comments reinforce our opinion that alternative lenders will continue to have a rich pipeline of opportunity as banks in Europe are forced to reassess their risk appetites as focus is once again placed on their balance sheets.”
Buchanan currently advises 15 London listed investment companies in sectors as diverse as renewable infrastructure, healthcare and student properties, life sciences credit, asset leasing and Canadian equities. If you would like to know more about our work in this sector, please enquire with Charles Ryland and Henry Wilson ([email protected]; [email protected] ).
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Appendix: 2017 and 2018 IPO activity in detail
Performance and fee data is sourced by the AIC / Morningstar, 2017 listing data is sourced from The Investors Chronicle via Numis. All other data is sourced from the AIC, the Association of Investment Companies, and reproduced with their permission. The colour chart sub-sector divisions are allocated by Buchanan. Any errors are my own.