Direct lending-focused investment trusts are leaving the sector one by one as deep discounts persist and the current market conditions have investors looking elsewhere for yield.
Direct lending trusts are trading on an average 25.7 per cent discount, with GCP Asset Backed Income having the largest, at 38.18 per cent and Riverstone Credit Opportunities Income the smallest with 16.08 per cent, according to the Association of Investment Companies.
Pollen Street Capital, which posted a return of -16.98 per cent over the last year, is set to leave the sector by the first quarter of 2024. The change in sector comes at a time when Pollen Street is looking to broaden its investment activities and become a holding company sitting above Pollen Street and the asset manager.
VPC Specialty Lending Investments’ shareholders have also recently approved the wind-down of the company. The board expects to start distributions by early 2024 and to have a substantial proportion of the portfolio realised within the next three years.
Meanwhile, RM Infrastructure and GCP Asset Backed Income agreed to merge in August, although the plans were later scrapped as the trusts failed to get shareholder support. Now RM Infrastructure Income is seeking to wind down.
Direct lending trusts came into existence at a time when traditional fixed income investments were yielding very low amounts through the era of very low interest rates. Meanwhile, major commercial banks retreated from lending to certain sectors and businesses, so that gap was filled with direct lenders and investment trusts were an easy way for retail investors to access the opportunity.
But for Ben Conway, head of fund management at Hawksmoor Investment Management, the direct lending funds do not look as attractive today as traditional fixed income investments such as corporate bonds.
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“There are very skillfully and actively managed corporate bond funds that aren’t taking that much credit risk and are yielding a healthy amount,” he said.
“The world has changed. And on top of that, the way you access direct lending trusts is through listed investment trusts and the liquidity of those are just not there. On the one hand it would be a shame if these types of trusts went out of existence, in terms of the diversity of the investment company sector, but we can’t have a situation where discounts are allowed to persist.”
He believes that ultimately there is a need for what he calls “creative destruction” in the investment company sector but says that it cannot happen through mergers. With the demand for investment companies falling, the supply needs to shrink to narrow the discounts, he commented.