Listed Investment Company IPOs
What is a LIC?
A LIC is a common type of structure used by investment managers to raise capital and create open public access to their investment fund. Shares in a LIC are traded on the stock market like any other company share, but instead represent shares in a fund rather than shares in one particular company. The LIC’s fund can be invested in a range of assets (such as cash, publicly traded stocks, private equity, debt securities etc.) depending on the fund’s stated investment strategy.
Primary benefits for an investment manager in creating a LIC are the ability to raise money for their fund, thereby earning management fees, and to have a liquid exchange such as the ASX that enables investors to buy and sell shares in the fund.
Listed Investment Companies Pros and Cons
LIC benefits for investors can be:
- Diversification: Investing in a LIC can give you a single point of exposure to a large number of pooled individual investments, and different types of asset classes.
- Investment strategy access: LIC funds are operated and managed by professional investors, often with the staff and resources to seek out and implement investment strategies too expensive or time consuming for individual investors to accomplish alone.
- Liquidity: Unlike many managed funds that rely on unit withdrawals, LICs can offer greater liquidity as they trade on public market stock exchanges such as the ASX.
- Investment strategy: Check the investment strategy of the fund to ensure it is appropriate with your personal investment time horizon and risk appetite. Check the track record of the fund manager or key executives involvement with other LICs if any. Find out how the LICs have stacked up historically against the benchmark or index on which they compare the fund’s performance, usually as percentage annualised return. For example, a fund with 8% annual returns compared to a benchmark index of 6% is said to be outperforming.
- Net Tangible Assets (NTA): In theory the value or market capitalisation that a LIC trades for on the stock market should equal the underlying value of the fund. Simply, if the fund owns $100m worth of assets, it should trade with a market capitalisation (total number of shares x share price) of $100m. In reality this is often not the case and the LIC trades either above or below NTA. Purchasing shares in a LIC trading below it’s NTA can represent a value buying opportunity, but could also be due to other circumstances such a lack of confidence in the investment manager’s performance, or high investment fees etc.
- Management Fees: Evaluate investment returns after total fees. Total fees can include success or performance fees or fixed and variable management fees. For example, if the fund has been beating their benchmark by 1%, but charges a 2% management fee, consider whether investing directly in the index is a better option.
Investing in a LIC IPO
Two different three letter acronyms crammed together might seem like high finance, but is actually fairly simple once you stick to the basics. First, be sure to read through the company’s prospectus and evaluate the fundamentals explained above. Understand the investment strategy, track record of the fund managers and any fees involved.
Net Tangible Assets at IPO
Also note from the prospectus who will bear the costs of the IPO; the fund manager or the investors. Due to the costs associated with an IPO, sometimes the LIC will be offered at a slight premium to NTA. For example, if the LIC is raising $100m by issuing 100m shares at $1 per share via IPO, but spends $2m on legal and administrative IPO costs, then it is effectively being offered at a 2% premium to NTA. In other words, investors are purchasing $98m worth of assets for $100m.
To compensate investors for the NTA premium, LICs will sometimes offer free attaching options to shares bought by IPO investors to sweeten the deal. The options will have their own expiry date and strike price that determines their effective value at IPO. Options may also be listed for trading themselves, meaning IPO investors can sell the options before having to wait until the expiry date. Check the prospectus to see if options apply for your LIC, and if so the terms of the options.
Applying for LIC shares at IPO
Consult your financial adviser if you have any questions on the suitability of the investment for you. Upcoming Floats provides a copy of the prospectus, key metrics and an overview of every LIC to make research simpler. Applying for shares in a LIC is the same as any other IPO and can be completed in a few simple steps using the Upcoming Floats platform.