U.K. Firms Offer ‘Once-in-a-Generation’ Opportunity, Schroders Says

(Bloomberg) -- Schroders Plc is seeking to list a fund that would capture a “once-in-a-generation opportunity” to invest in U.K. companies, even as a number of initial public offerings with a similar pitch recently failed to drum up enough demand.

Schroder British Opportunities Trust Plc plans to raise as much as 250 million pounds ($330 million) this month to take advantage of bargain valuations among U.K. companies, both public and private, which have been weighed down by prolonged Brexit-related uncertainty and the coronavirus crisis, more recently.

“There’s an amazing amount of value in the U.K. market,” Rory Bateman, head of equities at Schroders and co-manager of the trust, said in an interview, noting that some of the companies being considered for investment trade more than 60% below their fair value. Citigroup Inc. strategists also advocated for cheaper British equities over their more expensive American counterparts in a note on Sunday.

Cheapness alone hasn’t been enough to lure investors to U.K. equities, which remain some of the most underowned globally. The benchmark FTSE 100 Index, which has underperformed peers since the Brexit referendum, has fallen 15% this year, compared with a 6.3% drop in the Stoxx Europe 600 Index, while the mid-cap FTSE 250 Index has slumped 10%.

The trust has a “great line-up” of mid-sized companies in its sights, ranging from health care and technology to industrials and financials, Bateman said. The potential targets have “hit a bit of a bump in the road because of the pandemic,” but are still growing even amid other risks such as the divorce with Europe, he added. “We can get into these businesses at very attractive valuations.”

Brexit negotiations have entered another crucial week in an effort to overcome key barriers, if the U.K. and the European Union want to reach a trade deal before the transition period expires on Dec. 31.

No Easy Feat

Listing a new fund in London is not for the faint-hearted, as it stands. At least 14 such deals, including Schroder British and several green investment trusts’ ongoing IPOs, have been announced in the City this year, though only three have managed to raise enough money to start trading as of yet, according to data compiled by Bloomberg.

Among those that didn’t make it to the finish line is Sanford DeLand Asset Management Ltd.’s Buffettology Smaller Companies Investment Trust Plc, which planned to invest in 30 to 50 smaller London-listed companies. Tellworth British Recovery & Growth Trust Plc, which dubbed itself a “Best of British” fund, also withdrew its IPO after failing to meet its minimum size.

“The IPO process for a closed-ended fund can be a tough one, particularly when similar strategies already exist,” says Markuz Jaffe, an investment fund analyst at N+1 Singer. “The newcomer will typically need to demonstrate sufficient diversification from, or superiority to, the incumbents,” Jaffe said by email.

Still, Schroder British is confident it will succeed where others have struggled, thanks in part to its strategy of a 50:50 split between public and private equity. This is “something that is simply not seen, either across any investment trust or any other vehicle that’s out there,” according to Tim Creed, co-manager of the fund and head of U.K. and European private equity at Schroders.

Such private stakes could provide a way around the broader trend of de-equitization that has gripped the U.K. Not only is London seeing fewer new companies enter the public market, the roster of already-listed stocks is shrinking fast due to a string of mergers and acquisitions.

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