We think current discounts mean prospective risk-adjusted returns are highly appealing.
Alternative ICs are traded daily on major stock exchanges, allowing investors liquid access to diversified return streams. These companies tend to trade at a discount or premium to their underlying net asset value (NAV), and we think current discounts mean prospective risk-adjusted returns from many of these companies are highly appealing.
Attractive entry point
Discounts to NAV in the listed alternative investment company sector have widened significantly and offer an attractive potential entry point.
For the first half of the past decade the alternative IC sector generally traded around NAV. However, since the start of 2022 discounts have widened materially and in recent months have been at unprecedented levels for many companies.
Figure 1: Alternative investment company sector premium / discount to NAV
A range of fundamental and technical factors have driven discounts wider. Fundamentally, rising inflation and interest rates have led investors to question underlying asset values. They have also led to questions over debt structures and rising interest payments for non-fixed rate debt. There have also been some fundamental sector-specific headwinds, such as below-budget power generation within renewable infrastructure.
The rise in yields in other asset classes has also made some of the yields on offer from these vehicles less attractive on a relative basis than they had been historically. Technical headwinds have also arisen from the investor base of some of these companies suffering from outflows and/or consolidation. However, we now think these headwinds are more than reflected in share prices and the return opportunity from here looks appealing.
Substantial corporate activity
Current discounts are driving a substantial amount of corporate activity, which brings with it several catalysts for share price re-ratings.
2024 saw remarkable levels of corporate activity in the IC sector, with 11 mergers and 8 acquisitions driving a record £13.3bn in capital returns. 2025 is continuing this trend. M&A activity over the past few years has occurred at an average 5% discount to NAV with bid prices on average 31% above the undistributed pre-bid share price.
There have also been a significant number of strategic reviews within the sector that prompted several ICs to initiate managed wind-downs processes. These processes can create compelling opportunities for patient investors who are confident in underlying asset values and willing to wait.
Figure 2: IC sector major corporate action by year
These discounts are not going unnoticed. We’re seeing existing IC investors, some of which have more activist approaches, tilt portfolios towards alternatives. We are also seeing increased interest from outside the typical IC investment community and we are aware of companies that have raised, or are looking to raise, capital with a view to taking advantage of discounts in the alternative IC sector.
Discounts don’t need to narrow for returns to be attractive
Many alternative ICs own assets that generate long-term cash flows that are typically stable with limited economic sensitivity and significant degrees of inflation linkages. At current discounts, the dividend yields on many of these companies look interesting. Just take the yield pick-up on the infrastructure sector relative to 10-year government bonds issued by several European countries. You are getting paid to wait.
Figure 3: Infrastructure IC dividend yields vs 10 year European government bonds
Final thoughts
Discounts have widened for a range of reasons, with technical factors weighing heavily on the sector, and in recent months have been at unprecedented levels. We think the sector is poised for a wave of corporate activity that could drive significant re-ratings. Risk-adjusted returns across many alternative ICs look compelling. In short, we believe now is not the time to discount the discount.