Discounts continue to drive LIC/LIT structural reviews
There was a number of key announcements made by companies and trusts in the LMI sector in April, including a number of restructure proposals for those companies and trusts that have been unable to close the discount and a new LIT looking to enter the market.
1) Platinum LICs Undertaking Strategic Review
Platinum Capital Limited (ASX: PMC) and Platinum Asia Investments Limited (ASX: PAI) announced they will be undertaking a strategic review of the options available to address the discount to NTA. The strategic reviews come after the Manager announced a broader product review in February 2024 as the Manager undergoes a significant shake up given the continued outflows in FUM.
The strategic reviews will be looking at options to build scale and/or convert to an open-ended structure which would allow investors to trade at NAV.
The persistent relative underperformance of the Manager’s strategies has seen the Manager experience significant outflows. The exodus from the Manager has been reflected in the share prices of the LICs. The flow of funds is typically driven by performance, whereby during periods of strong performance managers will typically experience net inflows while periods of sustained underperformance will typically result in net outflows. In November 2023, we published reviews for PAI and PMC. In the PMC report we undertook an analysis of the excess NTA return compared to the benchmark since listing over rolling 3 year periods. The analysis determined that the share price typically trades at premiums during periods of relative outperformance and a discount during periods of relative underperformance. Sustained underperformance of the portfolio of PAI and PMC relative to the respective benchmarks has resulted in the companies trading at elevated discounts for prolonged periods of time.
The strategies implemented for PAI and PMC are also offered in ETMF structures - Platinum International Fund (ASX: PIXX) and Platinum Asia Fund (ASX: PAXX). Whether PAI and PMC seek to transition shareholders into the relevant ETMF structures or whether they seek to roll them into an unlisted structure is yet to be determined.
The PIXX and PAXX ETMFs have also been impacted by the exodus from the Manager. The below chart shows the number of units on issue for PAXX and PIXX over the four years to 31 March 2024. The units on issue for both ETMFs have been in a steady state of decline over the period with the number of units on issue declining by 31.2% for PAXX and 21.1% for PIXX.
When comparing the LIC versus the ETMF vehicles, the discount of the LICs has had an impact on shareholder returns when compared to the ETMFs. Below we show the cumulative total returns of the share/unit price of the LICs compared to the relevant ETMFs. Note, the returns for the LICs do not include the value of franking credits.
Investors in the ETMFs have experienced a better return than the investors in the LICs when comparing the periods from when the ETMFs were issued to 31 March 2024. We note the ETMF structure is a pass through vehicle and does not pay tax. This is one of the key differences between the two structures. PAI and PMC pay fully franked dividends, albeit the dividends have been volatile due to performance, while PAXX and PIXX pay predominantly unfranked distributions. While the discount that PAI and PMC have traded at has impacted shareholder returns, IIR views the discount to be a reflection of the demand for the products. The ETMF structures provide the ability for investors to exit at NAV (minus a spread), however given the ETMF vehicles have experienced a decline in FUM and units on issue highlights the bigger issues at play for the Manager.
2) FOR Seeks Approval to Delist
On 5 April 2024, Forager Australian Shares Fund (ASX: FOR) announced a proposal to delist from the ASX and continue operating as an unlisted unit fund. The Fund flagged its intentions to restructure back in October 2023 on the back of the Fund trading at a persistent discount to NAV.
A unitholder meeting regarding the proposal is scheduled to be held on 13 May 2024. To pass, 75% of unitholders are required to vote in favour of the resolutions being proposed.
The key dates under the proposal are tabled below. In addition to the structural change, unitholders will be voting for the implementation of a transitional exit fee that will be applied to redemptions for the 6 months post delisting. The exit fee will start at 6% and reduce by 1% per month. The transition exit fee will be charged by the Responsible Entity but will be retained in the assets of the Fund for the benefit of unitholders. The exit fee is designed to reduce a run-on in exits from the Fund in the initial months of the transition period.
In the event the delisting proposal is approved, unitholders will need to decide if they want to remain long-term investors in the Fund. Investors seeking to exit should consider selling their units on market prior to the suspension of trade if the units are trading at a discount less than the transition fee. For those investors seeking long-term exposure to the Fund, units can still be acquired at a discount to NAV, providing an opportunity to add extra value for investors.
3) MOT Completes UPP and Raises Additional Capital through Wholesale Placement
Metrics Income Opportunities Trust (ASX: MOT) has taken the opportunity to raise capital while the Trust is trading at a premium to NAV. MOT completed a Unit Purchase Plan (UPP) in early April, raising $44.5 million through the issue of 20.9 million units at $2.13 per unit.
A few weeks after the completion of the UPP, the Trust announced a Placement to wholesale investors. The Trust raised $92.4 million through the issue of 43.18 million units at $2.14 per unit.
In total MOT raised $136.9 million through the recent capital raisings with the Trust having 331.05 million units on issue once the units for the Placement have been issued. The capital will be used to fund the pipeline of investment opportunities that the Manager of the Trust has identified. With the capital raise representing a 23% increase to the market cap prior to the offerings, the Manager will need to deploy the capital promptly to minimise dilution to unitholder distributions.
4) RF1 Makes Changes to Strategy Allocations
During the month, the Investment Committee (IC) of Regal Investment Fund (ASX: RF1) announced they had approved the addition of the Global Equity Long Short Strategy to the investment mandate. The initial allocation to the Strategy is expected to be approximately 8% and was implemented during the month.
The addition of the Strategy comes as the IC determined to remove the Long Short Healthcare Strategy from the portfolio. The removal of the Long Short Healthcare Strategy was due to the resignation of Dr. Craig Collie, the Lead Portfolio Manager for the Strategy. Dr. Collie was deemed to be key to the success of the Strategy.
The Global Long Short Strategy provides exposure to a concentrated portfolio of long and short positions to global stocks. The Strategy will provide exposure to the strategy implemented for the VGI Partners Master Fund which is largely similar in nature to the strategy implemented by VGI Partners Global Investments Limited (ASX: VG1), a strategy that is managed by Regal. The Strategy was chosen for inclusion in the portfolio by the IC for the following reasons:
- Diversification benefits;
- Prevailing market conditions;
- Correlation benefits; and
- Investment opportunity.
The Global Long Short Strategy differs from the other strategies in the RF1 portfolio and therefore is expected to provide diversification benefits to the portfolio.
5) WMI Raises Capital through SPP and Placement
During the month, WAM Microcap Limited (ASX: WMI) completed a Share Purchase Plan (SPP) and Placement. The Company raised $90 million through the issue of 29.6 million shares at $1.418 per share.
The SPP and Placement was largely provided to existing shareholders, providing them the opportunity to increase their holdings in the Company. The Company has traded at a premium since September 2020 so the offer provided investors the opportunity to invest at NTA.
The capital raised will be invested in opportunities identified by the investment team. The Lead Portfolio Manager, Oscar Oberg, believes microcap companies are poised for recovery following the 2022 market sell off and stated in the press release that the team “are seeing the most compelling opportunities to deploy capital since the coronavirus pandemic.”
It is not surprising to see the offer well supported by shareholders. As shown in the below charts, the WMI portfolio and shareholder returns have outperformed the benchmark index (S&P/ASX Small Ordinaries Acc. Index) since inception and the Company has delivered a dividend yield substantially above the market.
6) Mark Landau Taking a Leave of Absence from L1 Capital
On 5 April 2024, L1 Long Short Fund Limited (ASX: LSF) announced the Joint Managing Director of the Manager, Mark Landau, is taking a leave of absence for medical treatment. The leave of absence is expected to be for 3 months, however this period may be extended. We wish Mr. Landau all the best and a speedy recovery.
7) Takeover Bid for Hipgnosis Songs Fund Provides Boost to GVF NTA
On 19 April 2024, Staude Capital Global Value Fund (ASX: GVF) announced the Board of Hipgnosis Songs Fund (SONG), one of GVF’s key holdings, had recommended a cash takeover bid for the entire company. In USD terms, this represents an uplift of over 33% to the March-end value. The transaction is expected to close in 3Q’2024. If the takeover bid is approved by shareholders, this will provide a boost to GVF’s NTA.
The Company has also announced that the Board has resolved to pay a special dividend of 1 cent per share, fully franked. The announcement comes as the Company celebrates its 10 year anniversary. The special dividend has an ex-date of 17 July 2024 and is scheduled to be paid on 19 August 2024.
8) LSX Internalise Investment Team
Lion Selection Group Limited (ASX: LSX) announced the management agreement with the external investment manager, Lion Manager Pty Ltd, will be terminated and the investment team will be bought in-house. Under the agreement:
- LSX will acquire the employees and assets of the Manager and assume responsibility for employee entitlements.
- The existing management agreement will be terminated with no termination fee payable.
- No cash consideration is payable by either party.
- Completion of the new agreement will be subject to the employees of the Manager entering into new employment agreements with LSX and LSX shareholders approving new long term incentive arrangements for the investment team members.
The decision to directly employ the investment team is designed to create alignment between each of the individuals and the Company and provides the Company the ability to have better control of costs as the Company seeks to grow.
9) SNC Seeks to Acquire Carbon Conscious Investments Ltd
Sandon Capital Limited (ASX: SNC) has entered into a Merger Implementation Deed with Carbon Conscious Investments Ltd (CCIL) to acquire all the outstanding shares of CCIL that are not owned by SNC and Sandon Capital Activist Fund. SNC has offered $0.0667 in cash per CCIL share, which values CCIL at ~$11.6 million.
CCIL is an unlisted public company that holds carbon property rights with respect to 30 farms in the WA wheatbelt covering ~17,000 hectares.
SNC and associates currently own 31.7% of the shares on issue with the cost to acquire the remaining CCIL shares ~$9.7 million under the offer. The bidder statement and offer open is scheduled for 6 May 2024 with the offer scheduled to close on 6 June 2024. If approved and subject to the outcome of a strategic review, SNC expects to continue to operate the CCIL business in substantially the same manner as it is presently operated.
10) Pengana Launching Listed Global Private Credit Trust
Pengana Capital Group (ASX: PCG) has announced that the PDS for the Pengana Global Private Credit Trust (the “Trust”) was lodged with ASIC on 19 April 2024. The offer is scheduled to open on 20 May 2024 with a closing date of 6 June 2024 and trading of units to commence on the ASX on 20 June 2024 with the code PCX.
The Trust is seeking to raise between $100 million and $250 million and will provide access to a portfolio of global private credit funds. The Trust seeks to generate strong risk-adjusted returns with a high degree of capital protection as well as stable and consistent income through the portfolio. The Trust will have a target cash distribution yield of 7%p.a. (net of fees, costs and taxes), with distributions intended to be paid monthly.
The Trust will be managed by Pengana Credit Pty Ltd with Mercer Consulting (Australia) Pty Ltd providing Investment Consulting services. Mercer will assist Pengana Credit with the selection of investments and be responsible for sourcing, research, due diligence and portfolio construction with respect to the underlying managers. Underlying manager’s and their funds will need to be approved by Mercer’s investment and operational due diligence teams.
Exposure to the underlying investments is achieved via an investment in Profit Participating Notes (PPNs) in the Listed (Hedged) Class issued by the Pengana Private Credit Feeder Fund (“Feeder Fund”). The Feeder Fund is an exempted company incorporated in the Cayman Islands with limited liability. The Feeder Fund invests in non-voting participating shares in the Master Fund, which has multiple share classes with unique investment objectives and strategies. Each Master Fund Class represents a sub-portfolio of cash, liquid credit investments and private credit investments that share common risk, return and other key attributes. Pengana Credit seeks to purchase what it believes to be the appropriate amount of shares in the Master Fund Classes to create a private credit portfolio designed to achieve the investment objective of the Trust.
The Trust will be seeking to manage the discount though a regular off-market buy-back scheme, in which the Responsible Entity will offer to buy-back 5% of the issued capital on a quarterly basis. The buy-back price will be equal to the NAV per unit at the buy-back pricing date plus the amount of distributions that unitholders would be entitled to if the units were not cancelled from the buy-back.
The Trust is the first new LIC/LIT to come to market since H&G High Conviction Limited listed in October 2022. Pengana is seeking to offer a product that satisfies the demand for private credit exposure while seeking to address some of the structural issues that can plague closed-ended funds.
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The views here are not recommendations and should not be considered as investment advice.
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