Annabel Brodie-Smith, communication director of the Association of Investment Companies (AIC) says: "Over the last eighteen months the issuance of zero dividend preference shares within the investment company industry has reemerged as a trend. These zero issues have taken advantage of a favourable capital gains tax rate of 18 per cent and have raised funds for investment companies in an environment where bank debt has been hard to come by and expensive.
"Recent media reports of a rise in the capital gains tax rate to close to 40 per cent if true are likely to dampen demand for new zero launches but we await the budget for clarification on this."
According to statistics from the AIC five investment companies raised money through ZDPs, also known as 'zeros' in 2009, all of which tended to be in the more specialist sectors.
Return from ZDPs, 1-yr
Source: Financial Express Analytics
In July, Ecofin Water & Power Opportunities, a Sector Specialist: Utilities investment company, raised £140m, with £60m of this through zero shares. A further four investment companies, all in the Private Equity sector, raised funds through the issue of zero shares. In June, JZ Capital Partners raised £10m through the issue of zeros. In August, Electra Private Equity raised £43m, in November JPMorgan Private Equity raised £30m, and in December F&C Private Equity also raised £30m through the issue of zeros.
Over a one year period to 17 May 2010, the best performing trust was the F&C Private Equity, which returned 65.48 per cent. During the period of 1 December 2009 to 17 May 2010, which takes into account the zero issue, the fund returned 25.55 per cent.
F&C Progressive Growth fund manager, Peter Hewitt says zeros were perfectly successful for a number of years when CGT was higher and remains optimistic for the asset class.
"If you were to ask me for reasons as to why to buy ZDPs the capital tax gains would have only been one of these. There are other benefits such as low volatility and good returns," he says.
"The tax doesn't really determine in the long run. It does affect any one single person's decision for the next three or six weeks, but I don't think it undermines the whole rationale for owning ZDPs."
Despite the increased issues last year, this year has proved to be quieter with only one zero being issued so far - this being the Aberforth Geared Income Trust. The trust announced on 27 April the success of its placing of zeros and geared ordinary shares, which raised £75m - split between 45m £1 ordinary shares and 30m £1 zeros.
Mick Gilligan, director of research and partner at Killik says he would be surprised if there were any more issues this year.
"I think the reason we saw a bit of a flurry was that private equity firms needed more capital and the banks didn't want to lend to them. This was the most attractive way of them raising money and it happened at a time when it didn’t look like we would see any imminent changes to the tax regime," he says.
"I don't think the possible changes to CGT will be a show stopper for ZDPs, but it will make them less attractive," he adds.
Hewitt agrees the key reason for the flood of issues in the market last year was due the restriction on banks lending money. He points out that one of the main reasons why Electra issued a Zero was because the bank would only lend for three years, whereas the ZDP was for seven years. He says there is still a big demand for ZDPs but agrees an increase to CGT might tamper this a little bit.
"ZDPs have sold off a little in the weeks after the election, but they are now back to good value again. Today [Tuesday] has been the first day since the possible CGT announcements that most zeros have edged better, which is interesting," he concludes.