In the run-up to Christmas we saw a steady stream of share offerings in the "alternative income" sector. These funds promise investors a high initial yield, limited prospects for income growth or capital gain, and business models detached from economic and market cycles.
Alternative income absorbed around 85% of the £4bn raised by the funds sector in the first half of 2017. Yet lately, some fund raisings have struggled, while the performance of many funds has flagged. Some, such as Empiric Student Property, have announced poor results. Others, such as Ground Rents Income, have been hit by regulatory changes. And infrastructure funds have wilted under the threat of a possible future Jeremy Corbyn government.
Two launches to watch
Tri-Pillar, a £200m infrastructure fund being launched by Andrew Charlesworth (former CEO of John Laing Infrastructure), has extended its fund-raising timetable into 2018. It aims to avoid UK politics by investing almost entirely overseas, especially in the US.
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It is targeting a return of 8%-10% a year, higher than most of its peers, and an initial yield of 4.5%. The potential for value-enhancement is important in the choice of investments. There is a pipeline of £500m of assets, of which it is in exclusive talks on £190m. Higher-risk assets in construction will account for a third of the fund, and with sterling rising, this may not be the ideal time to buy overseas. The team of 15 will have to find, invest in and manage assets around the globe political and regulatory risk is certainly not confined to the UK. But the fund may be worth backing if it returns for a secondary fund raising in future.
Aberdeen Standard has raised £187m, £63m less than it hoped, for a new European Logistics Income Trust (ASELI). The idea is to replicate in Europe the UK success of Tritax Big Box, which now has a market value of more than £2bn. Like Tritax, ASELI will invest in warehouses to service online retailers. The properties are located near major transport intersections, and packed full of expensive equipment. This and the long leases make it very hard for tenants to move elsewhere.
The story sounds compelling: a 5.5% yield from a 7.5% total return; a small premium to net asset value (versus the 14% premium at which Tritax trades); and strong potential growth online retailing accounts for just 8% of retail sales in Europe against the UK's 15%. But "me too" investment stories rarely run as smoothly as initially expected so, again, it may be wise to wait.
One that flopped, one that flew
Meanwhile Aviva, which tried to raise £200m for its Secure Income Reit, has abandoned the effort. It aimed to pay a 5% yield from total returns of 7%, by investing in "high-quality buildings leased to predominantly investment-grade clients". But the four seed assets (an office, a supermarket, a hotel and a GP surgery) suggested a lack of focus and limited potential for asset enhancement.
In short, sponsors have a history of issuing new equity until investors choke. Rather than buy the new offerings, wait until the money raised has been invested, the business model proven and a record established. There is now good value in many seasoned funds. For example, more interesting was the secondary offering last month by Ediston Property (LSE: EPIC), which floated three years ago and has a solid record of generating both income and capital gains. This financed the £144m acquisition of four retail parks, acquired on a yield of 6.4%, which Ediston sees as undervalued, with good potential for value enhancement.
