One of the most distinctive contributions investment trusts make to the UK investment landscape is giving everyday retail investors access to asset classes that would otherwise be difficult, or practically impossible, to reach directly. Private equity, infrastructure, and renewable energy are three of the best-established examples — sectors traditionally dominated by large institutional investors, now available through listed investment trusts that anyone with a share dealing account or ISA can buy. This article explores what these specialist sectors offer, and the particular risks involved.
Why the closed-ended structure suits illiquid assets
Private equity holdings, infrastructure projects, and renewable energy assets such as wind farms or solar installations are all fundamentally illiquid — they cannot be quickly bought or sold in the way listed shares or government bonds can. An open-ended fund holding significant amounts of such assets could face serious difficulty meeting investor redemption requests during periods of high withdrawals. Investment trusts, with their fixed pool of capital, are structurally well suited to holding such assets for the long term without being forced into disadvantageous sales to meet redemptions, which is why so many specialist trusts in these sectors exist.
Private equity investment trusts
Private equity trusts invest in companies that are not listed on public stock exchanges, either directly or via investments in private equity funds managed by specialist private equity firms. These companies span a wide range of sizes and stages, from early-stage ventures to established, mature private businesses.
Potential appeal
Private equity offers exposure to companies and growth stories not available through public markets, and some private equity strategies have historically targeted higher returns to compensate for the additional risk and illiquidity involved, though outcomes vary considerably and are not guaranteed.
Specific risks
- Valuing private companies is inherently more subjective than valuing listed shares, meaning a trust's stated net asset value carries more estimation uncertainty than for a portfolio of listed equities.
- Private equity trusts often trade at meaningful discounts to NAV, partly reflecting this valuation uncertainty and the illiquidity of the underlying investments.
- Returns from underlying private companies can take years to materialise, and individual investments can fail entirely.
Infrastructure investment trusts
Infrastructure trusts invest in physical assets and projects such as toll roads, hospitals built under public-private partnership arrangements, utility networks, or digital infrastructure such as data centres and fibre networks, often generating relatively stable, long-term, sometimes inflation-linked income streams from long-duration contracts.
Potential appeal
Many infrastructure assets generate contracted, predictable cash flows over long periods, sometimes with built-in inflation-linkage, which has historically appealed to income-focused investors seeking diversification away from traditional equity and bond income sources.
Specific risks
- Sensitivity to interest rate changes, since the value of long-duration, contracted cash flows is affected by discount rate assumptions, similar in some ways to bonds.
- Regulatory and political risk, since many infrastructure assets operate under government contracts, concessions, or regulated pricing frameworks that can change.
- Concentration risk in specific sectors, geographies, or contract counterparties, depending on the trust's specific focus.
Renewable energy investment trusts
Renewable energy trusts typically own and operate physical assets such as wind farms, solar parks, or battery storage facilities, generating income from selling the electricity produced, sometimes under long-term fixed-price contracts, and sometimes at prevailing market electricity prices.
Potential appeal
These trusts provide direct exposure to the physical energy transition, generating income tied to real, operational assets, and have appealed to investors interested both in potential returns and environmental considerations.
Specific risks
- Exposure to weather and resource variability (wind speed, sunshine hours), which can cause year-to-year variation in electricity generation and therefore income.
- Electricity price exposure, for trusts not fully protected by long-term fixed-price contracts, meaning income can fluctuate with wholesale energy markets.
- Sensitivity to interest rates, similar to infrastructure trusts, given the long-duration nature of the underlying cash flows.
- Some renewable energy trusts have experienced widening discounts to NAV in recent years, partly reflecting rising interest rates increasing the discount rate applied to future project cash flows.
Comparing the three specialist sectors
| Sector | Underlying assets | Key risk factors |
|---|---|---|
| Private equity | Unlisted companies, at various growth stages | Valuation uncertainty, illiquidity, individual company failure risk |
| Infrastructure | Physical infrastructure projects, often under long contracts | Interest rate sensitivity, regulatory/political risk, counterparty concentration |
| Renewable energy | Wind, solar, and storage assets | Weather variability, electricity price exposure, interest rate sensitivity |
Why these trusts often trade at a discount
All three sectors have, at various points, seen their trusts trade at meaningful discounts to stated net asset value, partly reflecting genuine valuation uncertainty for hard-to-price illiquid assets, and partly reflecting sensitivity to rising interest rates, which increases the discount rate applied to long-duration future cash flows and can also make the higher, often more predictable yields offered by government bonds relatively more attractive to income-seeking investors by comparison.
A worked example: illustrating discount sensitivity to interest rates
Suppose a hypothetical renewable energy trust values its underlying wind farm assets using a discount rate of 7%, reflecting long-term contracted electricity revenues. If prevailing interest rates rise, and the trust's valuers subsequently increase the discount rate used to, say, 8.5% to reflect the new environment, the calculated net present value of those same future cash flows would fall, even though nothing has changed about the physical wind farms or their expected electricity output. This could reduce the trust's stated NAV, and, combined with investor sentiment favouring higher-yielding alternatives elsewhere, could also widen the trust's share price discount to that lower NAV. This example is a simplified, hypothetical illustration of how discount rate assumptions affect long-duration asset valuations, not a description of any specific trust.
Practical considerations
- Review how much of a trust's income is contracted or fixed-price versus exposed to variable market prices.
- Check the trust's gearing level, since specialist trusts holding physical assets sometimes use project-level or trust-level borrowing.
- Consider that these sectors are generally more sensitive to interest rate movements than typical listed equity portfolios.
- Recognise that a wide discount may reflect genuine risk factors rather than an automatic buying opportunity.
Other specialist sectors worth being aware of
Property investment trusts
Some investment trusts, including Real Estate Investment Trusts (REITs), invest directly in physical property — commercial, residential, or specialist categories such as logistics warehouses or healthcare facilities — offering another route to illiquid, income-generating physical assets through a listed, tradeable structure. Property trusts share many of the interest rate sensitivity and valuation considerations discussed for infrastructure and renewable energy trusts above.
Debt and credit-focused trusts
Certain specialist trusts focus on lending directly to companies (private debt or "direct lending"), or hold specialist bond portfolios not easily accessed through mainstream bond funds, offering income-focused exposure to credit markets alongside the equity-focused strategies more commonly associated with investment trusts.
Royalty and intellectual property trusts
A smaller number of specialist trusts hold royalty streams from areas such as music catalogues or pharmaceutical patents, offering an unusual, niche income source with its own specific set of risks, including the eventual expiry of underlying intellectual property rights and the difficulty of independently verifying valuations for such unusual assets.
Due diligence specific to newer or smaller specialist trusts
Because specialist sectors often include newer, smaller trusts without decades of track record, additional due diligence is worth applying: checking the experience and tenure of the manager and management team in the specific specialist area, reviewing how the trust's assets have been independently valued (and by whom), and considering the trust's size and trading liquidity alongside the specific sector risks already discussed.
Sizing a specialist allocation within a wider portfolio
Given the additional layers of risk and valuation complexity discussed throughout this article, many investors who choose to include specialist investment trusts do so as a deliberately smaller portion of an overall diversified portfolio, rather than as a dominant holding, applying a similar "core-satellite" discipline to that discussed elsewhere on this site in relation to thematic ETFs. This allows participation in the potential benefits of these specialist, less commonly accessible asset classes, while limiting the effect of any single sector's specific risks on the portfolio as a whole.
The broader value of the closed-ended structure to the wider economy
Beyond the direct benefit to individual investors, specialist investment trusts also channel long-term capital into areas such as renewable energy infrastructure and growing private businesses that might otherwise struggle to access patient, long-term funding from other sources. This wider role is sometimes cited as one of the genuine strengths of the investment trust structure as a whole, connecting everyday retail investors' savings with long-duration, real-economy projects in a way that few other mainstream investment structures achieve as directly.
Checking ongoing charges for specialist strategies
Specialist investment trusts typically carry higher ongoing charges than mainstream equity trusts or broad index funds, reflecting the more specialised expertise, direct asset management, and sometimes physical operational involvement (for example, actively managing renewable energy assets rather than simply holding listed shares) required to run these strategies. Comparing ongoing charges figures across similar specialist trusts, and weighing them against the specific access and diversification benefit the sector provides, is a useful part of assessing whether a specific specialist allocation represents good value for its intended role in a portfolio.
Key takeaways
- Investment trusts give retail investors access to private equity, infrastructure, and renewable energy — asset classes traditionally reserved for institutional investors.
- The closed-ended structure suits these illiquid asset classes, since the manager is never forced to sell quickly to meet redemptions.
- Each sector carries specific risks: valuation uncertainty and illiquidity for private equity, regulatory and interest rate sensitivity for infrastructure, and weather and electricity price exposure for renewable energy.
- All three sectors are generally sensitive to interest rate changes, given the long-duration nature of their underlying cash flows.
- Wide discounts to NAV in these sectors can reflect genuine valuation and risk considerations, not simply an overlooked bargain.