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July 14, 2020, 11:58 a.m. EDT

Schroders considers investment trust to inject equity into U.K. small and midcaps hit by the pandemic

“For the U.K. economy to recover there needs to be greater availability of equity,” Schroders says

By Lina Saigol


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British fund manager Schroders is hoping to launch the investment trust in the fourth quarter of 2020.

British fund manager Schroders is considering launching an investment trust to inject equity into public and private markets, and support some of the U.K.’s smaller and midmarket businesses that are struggling amid the COVID-19 pandemic.

Schroders (LON:UK:SDR) is hoping to launch the trust in the fourth quarter of 2020, subject to client support.

The proposed trust would focus on investing in well-established small to midcap companies that have substantial workforces and need equity support during the coronavirus crisis, a spokesperson told MarketWatch.

“It is expected that a large number of public and private companies will need new equity in the coming months and years.

“Many do not have access to sufficient funding, preventing them from growing domestically or expanding internationally. For the U.K. economy to recover there needs to be greater availability of equity,” the spokesperson added.

If the trust goes ahead, investors will be able to buy its shares on the London Stock Exchange (LON:UK:LSE) .

Peter Harrison, Schroders Chief Executive, has said that U.K. business needs a £30 billion ($38 billion) stock market injection to help companies hit by the pandemic, and called on the government to create a “patient capital fund,” worth £20 billion to £30 billion.

“Encouraging companies to load up on more debt is not the answer. The solution lies in equity markets,” Harrison wrote in a recent comment piece.

Nearly £14 billion has been raised by 300 companies on the LSE in the first six months of 2020, more than in any year since companies scrambled to repair their balance sheets during the financial crisis of 2008 and 2009, Harrison said, citing Schroders research.

Companies with market caps in the £50 million to £2 billion range, make up 69 of the 300 public equity placings seen so far.

“Through these, they’ve raised around £3.8 billion. Our fear is that this could prove a drop in the ocean compared with what is needed,” Harrison said.

Read : U.K.-listed companies rush to raise equity to help steer them through the coronavirus crisis

“Put simply, there isn’t enough money to go around for this part of the market. And if you look at the detail, the money raised by companies isn’t from fresh investment, it has been recycled from other U.K. equities or from existing fund cash balances. This obviously can’t continue,” Harrison warned.

Harrison said the private equity industry was investing to support companies that require assistance during this crisis, but that firepower across the industry may be insufficient to continue this support indefinitely or to the extent required.

“So far, it’s been surprisingly easy for companies to raise money with demand buoyed by a resurgence in stock markets. But if markets become less resilient, or if a second wave of COVID-19 comes, companies will struggle to raise additional funds in flat or falling markets,” Harrison said.

Read: Global IPO market springs back to life after two months in a deep freeze

He added that there was a particular need to support companies in the small to midcap bracket, which are too large to be the focus of the government’s initiatives, but aren’t “mega caps” able to wield their clout with banks or credit markets.

In March, Schroders said total assets passed £500 billion for the first time, driven by inflows of client cash from a £32 billion ($40 billion) mandate win from Scottish Widows, as well as a wealth management partnership with Lloyds Banking Group (LON:UK:LLOY) , which added a further £12.6 billion ($15.8 billion).

Link to MarketWatch's Slice.