From pop music to commercial ships to the Airbus A380, we take a look at what’s been piquing the interest of specialist investors
It’s the brainchild of Merck Mercuriadis, the former manager to Beyoncé, Elton John, Nile Rodgers and Guns N’ Roses; its assets include more than 1,000 songs that have been number 1 or 2 in the global charts; and it’s structured as a Guernsey registered fund.
Hipgnosis Songs Fund has already raised £625m gross equity capital from investors since launching in July 2018. It is the most striking recent example of the growing appetite among investors for specialist funds that eschew conventional listed shares and securities in favour of alternative assets – ranging from ships and aeroplanes to solar panels, wind farms, major infrastructure projects and technology start-ups.
There’s no precise definition of what makes a specialist fund, but Mariana Enevoldsen, Director of Guernsey-based Estera, which is the fund administrator for Hipgnosis, says: “I would say they invest in alternative rather than in traditional assets. Usually, alternative assets are things you can touch and feel, although in the case of Hipgnosis, it holds intellectual property rights.”
The Specialist Fund Segment of London Stock Exchange’s Main Market includes many entities registered in the Channel Islands, and is, according to LSE, “designed for highly specialised investment entities that wish to target institutional, professional, professionally advised and knowledgeable investors”.
The significance, says Enevoldsen, is that the assets of specialist alternative funds are generally uncorrelated with more mainstream investments and don’t go up and down in tandem with stock markets or interest rates. “It’s an important part of a balanced portfolio construction. Taking the case of Hipgnosis, people will always want to listen to music, irrespective of the state of the markets,” she says.
Craig Cordle, a Partner at Ogier, the Guernsey legal adviser for the establishment of the Hipgnosis fund, echoes these sentiments. “There is interest from investors in getting exposure to types of investment that they wouldn’t otherwise be able to invest in,” he says.
Anyone can set up an account with an online stockbroker and build a portfolio of shares within a few hours, he points out. “But it’s not every day you can own a slice of an A380 aircraft, for example.”
Appetite for these investments – among both institutions and private investors – is growing because of the increasing challenge of getting a good return from conventional asset classes. And it’s a market in which the Channel Islands are well positioned, says Cordle.
“Most things we do in Guernsey deal largely in alternatives and are pretty specialist,” he says. “We don’t tend to see the typical investment trust in equities because it wouldn’t be the most efficient way of structuring that vehicle.”
Green funds, and those focusing on renewable energy, are particularly in vogue at the moment thanks to the high profile of the climate change issue. The establishment of a Guernsey Green Fund accreditation has also given the island a lead on some of its rivals, says Cordle. Infrastructure funds somewhat less so, thanks in part to the fall-out from the Carillion collapse.
Venture capital is also popular, with funds such as Merian Chrysalis investment trust offering the chance to get in early on tech start-ups.
There’s also strong interest from investors and managers in funds focusing on innovative alternative assets such as blockchain or cannabis-related products, says Enevoldsen.
Whatever might be piquing investors’ interest, specialist funds are bringing a welcome boost to plain vanilla equity and bond fund portfolios. Here, we take a closer look at five of the most interesting recent launches in the specialist space.
1. Hipgnosis Songs Fund
Hipgnosis invests in the copyright of hit songs by artists including the Eurythmics, Al Green, Booker T & The MG’s, One Direction, Mick Jagger, Tom Petty & The Heartbreakers, Chic, Sister Sledge, Diana Ross (pictured above), Beyoncé, Rihanna, Justin Bieber, Gwen Stefani, Michael Jackson and Santana.
It’s the only UK-listed investment vehicle to provide such pure-play exposure to music royalties and sets out to exploit royalties when a song is played or distributed – for example, through streaming – as well as ‘synch’ royalties from use in movies, TV shows and advertising. The investment adviser is The Family (Music), run by Mercuriadis.
Launched initially on the Specialist Funds Segment of London Stock Exchange, Hipgnosis Songs Fund has since been promoted to the Premium Listing Segment; investors so far have been primarily institutions but the new trading venue means it will be more accessible to private investors.
The fund raised an initial £395m from its initial IPO and two further placings; its C Share placing in October has just raised an additional £231m. Based on the issue price of the ordinary shares at IPO, the fund has a target dividend yield of 5% per annum and a target total NAV return of 10% or more per annum.
2. Tufton Oceanic Assets
This Guernsey-domiciled investment company, launched in December 2017 and listed on the Specialist Funds Segment of LSE, invests in second-hand commercial ships. The investment manager is Tufton Oceanic, which also manages private maritime investments for other clients, such as pension funds. In September 2019, it raised $30m in a new share placing.
Tufton offers investors the opportunity to have a stake in commercial shipping, where it says favourable factors include slowing growth in supply of new ships, secondhand vessels being below historic prices, and a forecast of increasing prices for new vessels over the next 10 years.
It looks to invest in ships that will enter into medium- to long-term charters, giving some protection from fluctuations in the market caused by “commodity prices, geopolitical events and other short-term supply-demand factors”. That includes tankers, general cargo ships and container ships, but not cruise ships. The investment target is an annual dividend yield of 7%, and in the last 12 months, the total return was 8.1%.
3. Quinbrook Low Carbon Power Fund
This private equity fund targeting investments in low-carbon and renewable energy in the US, UK and Australia raised a remarkable $1.6bn in March 2019 from institutional investors that are primarily pension funds and insurance companies in the same three countries.
It is managed by Quinbrook Infrastructure Investors, whose co-founders are Australian and whose background is in environmental, social and governance (ESG) investments. The fund’s investments include major wind farm developments in Texas and Arizona, as well as a ‘gas peaking’ scheme in Australia that will underpin renewables by using gas to top up electricity generation at peak times.
The fund is a Jersey Eligible Investor Fund. Carey Olsen acted as legal and regulatory adviser to the fundraising, while Oak Group is the Jersey administrator.
David Scaysbrook, Co-Founder and Managing Partner of Quinbrook, has said that the fund “seeks to deliver both ongoing cash yield and absolute gains from the creation of new low-carbon energy infrastructure assets and the remediation of impaired or undervalued energy assets and businesses”, with “a commitment to ESG principles”. Performance data is not available.
4. VLC Renewables Fund
VLC Renewables was formed in July 2018 as a partnership between renewable energy investment company Low Carbon and Vitol, the world’s biggest oil trader, with a trading volume of more than seven million barrels of oil a day. The Jersey-based fund is Vitol’s first significant venture into renewables and the company is the sole investor. It has committed €200m to the first tranche of funding, which will be used to target investments in onshore and offshore wind in Europe. Third parties may be brought in to fund future investments. Low Carbon Investment Management is the investment manager of the fund.
VLC has just one significant investment to date: the Zaporizhia wind farm in Ukraine, which will generate 500MW of electricity and is expected to be one of the top five largest operating onshore wind sites in Europe when it is up and running in 2020. At that point, it will generate enough clean energy to power more than 780,000 homes and offset 4,860,000 tons of carbon emissions.
As Simon Hale, Investment Director at Vitol, explains: “By 2025, almost 27% of European electricity will be generated from wind and solar. As a major participant in Europe’s power markets and as a significant investor in energy infrastructure worldwide, Vitol is keen to build a portfolio of renewable investments to complement its existing activities.”
Law firm Mourant advised Low Carbon in connection with the establishment of the fund, which has not published performance data.
5. Doric Nimrod Air Three
One of the more unusual funds to be listed on LSE – or on any stock market – Doric Nimrod Air Three invests exclusively in aircraft and, more specifically, in one particular aircraft: the Airbus A380. The fund was launched in 2012, the third in a series of funds holding aircrafts as assets, and is a Guernsey incorporated company listed on LSE’s Specialist Fund Segment – which means it is available to private investors.
Since its establishment, it has bought four A380s, which have each been leased on 12-year terms to Emirates Airline in Dubai. The fund receives income from these leases, which enables it to pay a very healthy dividend, equivalent to a target 8.25% per annum on the issue share price, but which has recently topped 10% as the share price has dipped.
The potential downside is that aircraft would normally be regarded as depreciating assets, and when the leases come to an end, the sum investors will get back is based on what the aircraft can be sold for. Independent estimates obtained by the company suggest that the four aircraft will be worth in total the equivalent of 178 pence per share, relative to a current share price hovering around the 80p mark.