This week I thought I might look at some of the recent new issues in the sector. The 2012 vintage are an eclectic bunch. I have identified nine (a hedge fund, a property fund, two debt, two insurance, one multi-asset, an emerging market and a resources fund), though I am prepared to admit I might have missed one or two, and that list excludes some significant secondary issues such as Better Capital 2012 and the C share for Doric Nimrod 2.
The largest new issue was Starwood European Real Estate Finance, which raised £228.5 million in December. The concept behind the fund is fairly straightforward – banks in Europe are awash with real estate debt and they need to reduce their exposure. Property owners will need to refinance and Starwood will be there to fill the gap.
The portfolio will be split roughly 45:40 senior and subordinated loans with the balance a mixture of bridging loans and development finance. It aims to be fully invested by the end of this year and is targeting a 7% dividend in year two.
It will be interesting to see how it is doing then but I expect they will try to expand the fund this year, if conditions permit. As an aside, the headline fee of 0.75% on net assets and the performance fee (described as carried interest) at 20% on returns over 8% per annum seems reasonable.
However, the managers also get an origination fee of 0.75% of all new investments made by the company, which seems to encourage the managers to churn the fund. And, while the fund will not normally be geared, it is allowed to securitise its investments, selling on the senior debt. This would boost the headline turnover on the fund and the origination fee income for the manager.
The second largest issue of 2012 was Battle Against Cancer Investment Trust (Bacit). Launching a fund with minimal running costs, a very broad investment mandate and annual donations of 1% of net asset value (NAV) to good causes was a great idea.
It had been tried before, with an open-ended fund designed to benefit the Prince’s Trust (Invest & Give) but that failed to attract enough money to make it viable. I wonder whether it might have worked better as an investment company?
Other investment companies make charitable donations but these tend to be modest (which I agree with – Bacit’s annual donations are an explicit upfront ‘cost’, other funds should aim to make as much money as possible for investors and allow them to make the charitable donation).
For me, the interesting aspect to Bacit is its investment strategy. Bacit is a multi-asset fund of funds and is trying to generate 10%-15% per annum returns from a mixture of listed equity, hedge, real estate and private equity – just about anything, in fact, with the exception of the tobacco industry.
In keeping with its mandate, it will also invest around 1% per annum in cancer research. The initial portfolio includes many names familiar to investors in investment companies: BlackRock, CG Asset Management, Baker Steel, Genesis, Prosperity and Permira.
There is also a long list of other managers, some of which might be listing investment companies of their own in the future. Barring the sudden discovery of a cure for all cancer (which we might all wish for but seems unlikely), Bacit is likely to be around for a long time. There are continuation votes every five years but, unless the investment performance is a total disaster, I doubt it will be wound up. This means Bacit’s investment managers can invest for the genuinely long term and it will be fascinating to see how that plays out over the coming years.
BlueCrest BlueTrend launched in March, bucking the trend in the ever shrinking investment company hedge fund sub-sector. It is a feeder fund for BlueTrend Master fund and a leveraged version of that fund. It invests in bonds, interest rates, equities, foreign exchange, and commodities and, as the name suggests, it aims to generate returns by jumping onto a trend as it develops and jumping off again before it dissipates. The target return is 15%-20% per annum; it is unfortunate therefore that from launch to the end of December 2012 BlueCrest BlueTrend only managed to generate NAV growth of 1.72%, the most disappointing period for performance from the fund for many years. Shareholders might be able to take some comfort, however, that the performance so far in January 2013 has been at least as good as for the nine months of operation in 2012.
One observation, in the midst of the debate about corporates paying UK tax: all three of these funds are domiciled in Guernsey and only one of the new issues, Ground Rents Income (which I might have a look at another time) is domiciled in the UK, and it is taking advantage of the Reit regime.