Drive for green schemes fuels investment trust funding boom

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Booming demand for green infrastructure investments has helped power a record run of fundraising for UK investment trusts, with managers smashing the previous annual record for capital raising in the first nine months of 2021.

UK investment trusts have raised £8.7bn in secondary fundraising so far this year, according to the Association of Investment Companies (AIC), already surpassing the previous 12-month record of £7.4bn set in 2019.

Trusts that invest in renewable energy infrastructure from wind farms to biogas and batteries pulled in the most cash, with more than £1.7bn raised, followed by other infrastructure-focused vehicles at £988m. 

Although fundraisings often tap institutional investors and wealth managers, there has also been a rise in direct retail participation as trusts throw open their offers to ordinary investors.

The rapid pace of fundraising highlights the robust appetite for green-tinted investments, and how investment trusts have gained popularity as a vehicle to invest in alternative assets. Income-conscious investors are also lured by the attractive yields on offer in the sector, according to managers.

Melissa Gallagher, co-head of investment trusts at BlackRock, said the year’s fundraising had “followed a ‘barbell’ approach”, with demand flowing to trusts with yields above 4 per cent or those investing in stocks with a focus on growth.

She said that the strong raisings for renewables and infrastructure partly reflected the “attractive yields” on offer from trusts investing directly in these projects.

The largest renewables fundraiser, Renewables Infrastructure Group, for instance, has invested in more than 80 schemes including wind farms, solar arrays and battery facilities.

Investment trusts, a category of UK investment vehicles that are structured as listed companies, have proved useful to investors looking to tap long-term assets such as infrastructure.

The structure allows investors to enter or exit their positions in the trust via the stock market while the trust company holds the underlying assets for the longer-term. In contrast, mutual funds generally need to buy and sell underlying assets to facilitate investors’ moves in and out of the fund, a set-up that makes it more difficult to back years-long projects such as battery storage, renewable power generation or energy efficient infrastructure.

Richard Stone, chief executive of the AIC, said investment companies “continue to provide investors with a proven means of gaining exposure to less liquid assets”. 

Other illiquid asset classes have proved popular for fundraising this year, with property trusts raising more than £1bn, while vehicles that invest in early-stage and private businesses also reeled in cash.

“With the increasing trend for companies to remain private for longer it is likely that there will be continued demand for these types of investment trusts,” Gallagher said. “As they are highly unlikely to be able to invest in these companies directly, one of the best ways to access these illiquid assets is through investment trusts.” 

The biggest fundraiser to date was Baillie Gifford’s Schiehallion trust, which invests in high-growth companies before they go public. The trust, which owns stakes in TikTok parent ByteDance and payments processor Stripe, raised £503m in fresh cash.

“We’ve seen alternatives become a materially bigger part of the investment trust sector as investors seek asset and income diversification,” said Simon Crinage, head of investment trusts at JPMorgan.

The fundraising tallies do not include the initial public offerings for new trusts, which brought in an additional £2bn so far this year.

The figures will be welcome news for the UK government, which has been trying to encourage investors to back more long-term environmental projects as part of its agenda for a green recovery from Covid-19. Investment in renewable energy trusts has picked up sharply in recent years as the government has accelerated its green plans.

Prime minister Boris Johnson and chancellor Rishi Sunak in August urged institutional money managers to support an “investment big bang” to back British assets including infrastructure. Some investors, however, have been reluctant to heed the call given the risks and higher costs associated with backing years-long building projects.

Investors have also shown there are limits to demand for ESG opportunities in investment trusts. Liontrust in July backed out of an IPO for a sustainable investment trust after it failed to raise its minimum target of £100m.