PENSIONSANDSAVINGS.COM

• Assura-PHP tie up is truly great news for UK investment trusts and investors.   
• Critical NHS infrastructure stays in the UK, available for pension funds and other long-term investors to benefit from, while supporting UK markets. 
• Hope this will help the Government recognise that UK-listed closed-ended investment companies can be ideal way for pension funds to support UK infrastructure and private equity.  

Assura is a FTSE 250 real estate investment trust that owns and manages hundreds of GP surgeries and UK healthcare facilities, playing a crucial, but often overlooked role in NHS primary care. The deal approved by shareholders means this important NHS infrastructure will remain in domestic hands after shareholders accepted the merger offer by Primary Health Properties (PHP). This is brilliant news.

Assura investors are to be congratulated for their far-sighted wisdom: Assura’s shareholders have rejected a KKR private equity cash offer that slightly exceeded the PHP bid, based on its current share price. They have voted instead to benefit from future growth, income and cost reduction themselves, rather than potentially enabling the business to disappear offshore, along with the loss of future growth, tax revenue, and control of such important pieces of our health system.. This is a clear vote of confidence in the management of the enlarged group.

The new entity will have a combined value of around £3billion, making it more easily investible for pension funds and wealth managers: One of the Government’s aims is for UK pension funds to invest more in British infrastructure and growth. The new merged business offers such investors the potential benefit of quasi-Government-backed, income streams, future growth and cost rationalisations from economies of scale, such as possible halving of HQ costs and cheaper debt.  Dividends and revenue should be relatively secure, being backed by NHS contracts.

The vote helps avoid some of the pitfalls which led to our care home crisis: This merger avoids the danger of foreign private equity ownership of parts of the NHS, helping avoid the problems that have devastated our social care sector.  Private equity businesses bought out most of Britain’s care homes, often in undervalued markets, then extracted equity by selling the properties, took on significant additional debts, ruthlessly cut costs and sold businesses on, saddled with high expenses. With the current dislocation in the UK investment company sector, created by flawed regulations that have deterred domestic buying, it is excellent to see these shareholders refusing to sell on the cheap, especially as the assets have performed well for many years.

It is great news for the investment trust sector – and for UK markets – that can help boost growth:  UK-listed closed-ended investment companies have suffered serious problems, following regulatory requirements which have driven investors away from the sector. Being such a significant part of the FTSE250, investment trust weakness has also depressed UK equity markets as a whole, contributing to global underperformance. The sector, with significant discounts, low valuations, share buybacks and inability to raise new funding, is under real threat. Foreign predators have been closing in on these companies, which offer tremendous long-term growth assets, but which have been abandoned by UK pension funds and wealth managers for no good reason in the past couple of years or more.

Government and Regulators have damaged the sector, but hopefully they will wake up to the benefits of closed-ended investment companies, before more disappear from our markets: The UK investment trust sector has been reinvented from mostly comprising vehicles for retail investors to invest in public equities, to being predominantly transparent efficient holding companies for providing equity for private long-term investment in capital intensive industries (real estate, infrastructure, power generation, life sciences and so on). The investment trust structure can have advantages for long-term investors seeking expert management of less liquid assets in important productive sectors that positively contribute to the future economy and wider society. Surely these advantages should be reinforced and strengthened through regulation, not attacked.

Calls for Pension Schemes Bill to be amended: The current wording of the Pension Schemes Bill explicitly excludes UK-listed closed-ended investment companies from qualifying for the Mansion House 5% exposure to UK private equity and infrastructure. This makes no sense.  Indeed, many of these companies provide an ideal way for pension funds to start building their exposure now, rather than waiting until more schemes have merged – which is likely to take several years.  Baroness Bowles and myself have been calling for regulatory action to restore the competitive position of this sector, which has been so damaged by cost disclosure practices, but this exclusion makes things worse.  It is a strange provision in the Bill and hopefully just a mistake. But if the Government does not remedy this error itself in the Commons, we will be seeking to amend the Bill in the Lords, so that closed-ended funds are included.

Closed-ended fund structures are ideal for holding long-term, illiquid assets: Unlike open-ended funds, listed closed-ended investment companies do not need to disturb the underlying portfolio (such as selling the best assets) if a few investors want to switch to other businesses (remember Woodford?) and don’t need to hold large proportions of liquidity, in case of redemptions. To exclude such companies from Mansion House qualification, would prevent pension funds being attracted back to such companies, even if they sell at significant discounts in difficult markets. That may even make us all poorer.

Could this Assura-PHP deal be the start of a revival for UK investment trusts? There is much more to do, but it is a great start.