Investment trust consolidation continues with three-way merger proposal

Pressure on investment trusts in the “alternatives” space is sparking more industry consolidation, with three similar trusts investing in infrastructure set to merge.

GCP Infrastructure Investment Ord (LSE:GCP), which has a £650 market capitalisation but more than £1 billion in assets under management, said it had agreed a merger with GCP Asset Backed Income (LSE:GABI), which is run by the same firm (Gravis Capital Management), and is also in talks with RM Infrastructure Income Ord (LSE:RMII), which is run by London-based RM Funds.

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GCP Asset Backed Income has a £244 million market cap and RM Infrastructure has an £80 million market cap. All trusts trade on large discounts due to the challenging environment for infrastructure investments.

GCP Infrastructure Investments is on a 31% discount, GCP Asset Back Income is on a 38% discount, and RM Infrastructure Income is on a 24.5% discount.

Rising interest rates has increased yields on bonds, which has affected the valuations of investments that were considered “bond proxies” as they also provided stable incomes.

With investment grade corporate bonds yielding about 6.5%, and UK government bonds offering investors 5% in shorter maturity debt, investors are no longer so keen to own bond alternatives, such as infrastructure trusts. 

If the triple merger goes ahead, the enlarged trust will have a market cap of around £1 billion.

If approved by shareholders, GCP Asset Back Income’s assets will be transferred to GCP Infrastructure to be managed by GCP Infrastructure’s existing team. The same process will happen to RM Infrastructure Income if it is acquired.

The enlarged trust would reduce debt and return £100 million to shareholders via buybacks or dividends over the next two years, and introduce a sustainability objective.

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It will also seek to invest at least 75% of its assets in infrastructure and other real assets that benefit from public-sector backed, contracted, or predictable cash flows.  

The chair of GCP Infrastructure Investments, Andrew Didham, said: “There has been considerable consolidation among investors in investment companies like GCP Infrastructure. With this comes the need for consolidation among investment companies, to provide their investors with entities of greater scale, more liquidity and lower ongoing costs.

“GCP Infrastructure is well placed to drive this consolidation, and the board believes that the GABI Scheme and, if progressed, the RM Scheme, will deliver improved liquidity in the company's shares, a lower ongoing charges ratio and a wider pool of potential investors. We expect the enlarged company will be well placed to continue to deliver attractive, long-term risk adjusted returns to shareholders.”

If completed, the merger is expected to conclude before the end of 2023.

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Numis, the stockbroker, said this deal would be positive for shareholders.

“Investors are generally calling for larger, more liquid vehicles and we believe that both GABI and RMII are subscale vehicles and it is no surprise to see them subject to corporate action. There is some significant crossover in shareholders and therefore we can also understand why these investors may wish to consolidate their holdings,” it said.

It adds, however, that the boards may still need to provide some additional information to justify the merger to all shareholders.

The proposed merger follows a wave of activity in the investment trust sector. Abrdn is combining abrdn New Dawn and Asia Dragon, while CT Property accepted an offer in the spring from LondonMetric Property (LSE:LMP) and Industrials REIT has been bought by private equity group BlackStone.

Ewan Lovett-Turner, head of investment trust research at Numis, says if discounts persist, private buyers will seek to take advantage of attractive values for high-quality assets.

He expects the pick-up in takeover activity to continue, particularly in investment trusts that buy illiquid assets, such as property and infrastructure.

We reported that eight trusts could be takeover targets, including private equity and renewable energy infrastructure portfolios.