Consolidation, activism and scale continue to reshape investment company sector

Since the start of 2023 there have been 12 deals among equity investment companies, alongside a series of manager changes and mandate realignments. Whilst investment performance has been a key factor behind the decision to combine with another investment company, creating vehicles of a size more relevant to private wealth managers and direct retail has been an important feature of the combinations completed. However, the trend for larger investment companies does not, in our opinion, signal the demise of diversity in the sector as we believe that the ecosystem will be able to support investment companies across a range of sizes:

• Mass: Scaled companies with a marketing budget for retail, an ability to manage discount volatility and a differentiated offering to open-ended or ETF options.
• Mid: Meaningfully sized companies pursuing differentiated investment strategies, but where appetite may be more cyclical or thematic, and/or where institutional value investors may have substantial ownership positions.
• Niche: Smaller, specialist propositions benefitting from specific supportive factors that could include a supportive large shareholder, a “fan-club” investor base or operate in a capacity-constrained investment strategy.

In the alternatives space, there have been few combinations amongst investment companies, but the pace of corporate activity has been accelerating with an increasing prevalence of cash takeovers, portfolio sales, internalisation of management, mergers with companies outside the sector and planned wind-downs. A significant driver of this corporate activity has been due to changes in institutional investor AUM and asset allocation, with those investors wanting to see larger companies with a greater emphasis on capital growth, rather than income, as part of their total returns. The pricing of several recent cash exits in alternatives suggests that investors, frustrated by persistent wide valuation discounts, have been willing to accept compromises on valuations to achieve liquidity in the absence of existing investment companies able to meet their needs. However, there remains scope for some intra-sector consolidation, led by the larger companies and/or those with a demonstrable track record of delivering attractive NAV performance.

Although consolidation can be a route to value creation or value recovery over time, it requires careful navigation, especially where there are activist investors on the shareholder register. Consideration is required for the calibration of the commercial terms of any transaction, future investment strategy and ongoing corporate governance. Shareholder communication and liaison need to be central to any proposal.

Increased scrutiny of governance, capital efficiency, and accountability means that NEDs have a crucial role in steering companies through any periods of transformation, ensuring that strategic decisions — whether to merge, wind down, or maintain independence — are underpinned by robust analysis and a clear articulation of shareholder value.