Interactive Investor

Eight investment trusts that could be takeover targets

2nd August 2023 13:49

by Sam Benstead from interactive investor

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A successful bid would provide an instant uplift for shareholders, writes Sam Benstead.

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Wide investment trust discounts are making them appealing takeover targets, with rumoured or confirmed deals likely to lead to sudden share price jumps.

The Association of Investment Companies (AIC), the trade body for the trust industry, calculates that the average discount for equity trusts is now 15%, a level not seen since 2009.

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Trusts that buy so-called alternative assets, such as private equity, infrastructure or property are on even wider discounts to net asset value (NAV).

Discounts have widened due to negative sentiment about the economy, and therefore private company valuations, but also due to the impact of higher interest rates.

When rates rise, so do yields on bonds. Higher bond yields make some alternative investments less appealing as investors can get an income from bonds, and no longer have to stray into complex and expensive areas.

The discounts are beginning to tempt buyers. Civitas Social Housing, a real estate investment trust, is being bought at a 27% to NAV, but the deal sent shares 50% higher due to a wide discount.

CT Property accepted an offer in the spring from LondonMetric, sending shares 26% higher after the bid was announced. Industrials REIT was bought by private equity group BlackStone at 42% premium to its share price.

Ewan Lovett-Turner, head of investment trust research at stockbroker Numis, said: “If discounts persist, we expect that private buyers will seek to take advantage of attractive values for high-quality assets. We have already seen this in the property sector, with the acquisition of Industrials REIT by Blackstone. We believe merger and acquisition (M&A) has the potential to meaningfully improve sentiment towards the sector.”

Lovett-Turner says that he expects the pick-up in takeover activity to continue, particularly in investment trusts that buy illiquid assets.

He adds: “Trusts are now more biased towards illiquid assets, which we believe has increased the potential for M&A given that assets are more subjectively valued and harder to liquidate.

“The change in interest rate environment has left investors unsure of the value of these illiquid asset classes and many share prices trading at significant discounts, meaning that buyers can offer a price that may be at a discount to the stated NAV, but may still be attractive to investors.”

Which trusts could be targets?

Trusts that invest in illiquid assets are likely to be targeted, with Numis saying the property sector is likely to continue being targeted.

Andrew Rees, a research analyst at Numis, says that Ediston Property (LSE:EPIC) is the most obvious target, as it is currently undertaking a strategic review, and the board has expressed a desire to be consolidated.

He adds that the diversified commercial property sector is also likely to see further consolidation given the number of small, less liquid fund.

James Carthew, head of investment trust research at research group QuotedData, says that Balanced Commercial Property , where there is a £342 million gap between the NAV and the market cap, could be a target.

“They key asset is St Christopher’s Place Estate - a shopping quarter just off Oxford Street, which could be attractive to a number of bidders. The fund’s NAV did drop quite a bit at the last revaluation in December, so there might be more pain to come. However, probably not as much as the discount is implying,” he said.

Nevertheless, Rees says that investors should not speculate about takeover targets given very binary black/white outcomes. Instead, he suggests investors buy funds that can deliver attractive risk-adjusted returns over the medium term.

Infrastructure

Peel Hunt, the stockbroker broker, says infrastructure trusts may be targeted by buyers, as discounts have recently widened.

“The recent de-rating of the various listed infrastructure sectors has us questioning whether the M&A machine might kick into gear again should depressed share prices persist.”

Their research takes in the share price, market capitalisation, and the number of assets in each companies’ portfolio to identify undervalued investment trusts that could appeal to outside investors.

Only a handful of trusts met its criteria. This included renewable energy trusts Aquila European Renewables and Foresight Solar. They both trade on discounts of around 20%, and yield around 6% and 7% respectively.

Peel Hunt adds that US Solar Fund has been “up for sale” since October 2022, but has presumably not received a single bid high enough or close enough to NAV that the board have deemed worthy to put before shareholders.

The broker also flagged digital infrastructure funds Cordiant Digital Infrastructure and Digital 9 Infrastructure. They trade at 27.5% and 50% discount and have relatively concentrated portfolios.

Nick Greenwood, an investment trust investor, says that renewable energy infrastructure trusts may be targeted as they own valuable assets in a growing area, but trade at wide discounts.

His top pick would be Aquila European Renewables, which is at a 21% discount.

“It owns solar farms in Spain and wind farms in Norway – both are very in-demand assets. If you were to spin off its holdings, then they could sell for more than the current NAV,” he said.

When looking at takeover targets, he said investors are trying to find high-quality assets at reasonable discounts, or distressed assets at wide discounts. Aguila would be the quality play, while Civitas Social House was the distressed bid, he says.

Private equity

In the private equity sector, Carthew says two trusts could be targeted by bidders.

“While we’d hate to see a repeat of the Electra saga (where a top-performing trust was hit by an asset stripper and dismembered), you have to admit that there are a number of vulnerable targets.

“Top of the list are probably Pantheon and HarbourVest, which offer upsides of £782 million and £1.35 billion to prospective bidders if they can liquidate the portfolios at NAV.

“A more patient investor running off the portfolio would almost certainly see uplifts of more than that as most of these funds experience NAV uplifts as they exit positions.”

Trust targetDiscount to NAVSector
Ediston Property21Property
Balanced Commercial Property41.5Property
Aquila European Renewables21Infrastructure
Foresight Solar 20Infrastructure
Cordiant Digital Infrastructure27.5Infrastructure
Digital 9 Infrastructure50Infrastructure
Pantheon International42Private equity
HarbourVest Global Private Equity42Private equity

Source: Morningstar, 2 August 2023. 

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