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Charles Cade: Difficult issues - the art of launching shares at discount

Most investment companies trade on discounts, making them difficult to grow, however good their performance record. This can be frustrating for managers as capital can only be raised when an asset class or management style is in favour, usually after strong performance.

Following a downturn, when valuations are lower and, arguably, there are more attractive investment opportunities, it is far harder to raise capital. Increasingly, funds are seeking ways to grow their assets while trading at a discount. These include:

Secondary issues at a discount

Almost £1 billion has been raised recently by three private equity funds (SVG Capital3i Group and JZ Capital Partners) to shore up their balance sheets. Controversially, JPM Private Equity raised $37 million via an offer at a 30% discount to take advantage of investment opportunities, with a further $63 million to be issued on a non pre-emptive basis.

We feel shareholders should vote against dilutive issues unless there is a compelling argument and should have the opportunity to participate on the same terms rather than a non pre-emptive placings.

Subscription shares/warrants

A new warrant, often structured as a subscription share to be eligible for Isas, has emerged in recent years. This has a much shorter life, often three years, with a rising call price to encourage early exercise, potentially within the first year. Their popularity is growing, with issues due from several more funds, including Throgmorton and Schroder UK Growth. While liquidity is a problem for many listed funds, we believe the main beneficiaries are the fund managers and advisers, rather than shareholders.

Convertibles

A recent 6% convertible issue by Ecofin Water & Power Opportunities appeared attractive due to equity participation with a higher yield and greater downside capital protection. The £80 million issue at 100p was oversubscribed and it is now trading up at 106.75p. BlackRock Latin American is marketing a $75 million 3.5% convertible and further issues seem likely.

ZDP

ZDPs appear likely to make a comeback due to the difficulties in securing bank facilities and their tax benefits for UK private investors. The recent £60 million 7% ZDP issue by Ecofin Water & Power Opportunities is trading at 106.25p and Electra plans to issue a well covered £60 million ZDP with a life of seven years and a 6.5% redemption yield.

Charles Cade is head of investment company research at Numis. 

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