A right royal row is underway about the future of Ranger Direct Lending (RDL). Letters are flying back and forth and PR companies are working overtime but Ranger’s shares continue to languish on the widest discount of any fund in the debt sector, possibly as us ordinary shareholders fret about the bills that a being racked up in defence of the board’s plans, on top of the hefty legal bills and, soon, a double set of management fees.
Ranger is just three years old. Its third birthday was an important milestone as the board is now free to fire the manager and has duly done so. The manager was on twelve months’ notice however and has shown no signs of waiving its entitlement to its remaining fee in any fit of remorse.
The manager’s main sin was to invest a large chunk of the fund’s money in a provider of SME credit, Princeton Alternative Lending LLC, which in turn invested money through a limited partnership, Princeton Alternative Income, in a credit line provided to consumer loan company, Argon Credit. Princeton was named as a potential partner in Ranger’s prospectus but the indication was that this would account for $15 million to $20 million of Ranger’s portfolio. The actual exposure was much higher than this, at $28.3 million. On 9 March 2018, both Princeton Alternative Lending LLC and Princeton Alternative Income LP filed for bankruptcy.
In March 2017, before the extent of the Princeton problem became apparent, Ranger’s shares were trading north of £11. Since then, a substantial discount has opened up and the shares, while off their sub-£7 lows at the end of 2017, still languish on a discount of about 20%. Unsurprisingly, the persistent wide discount attracted the attention of value players, notably Oaktree and LIM Advisors.
The board, whether it realised it or not, effectively put the fund into play on 1 November 2017 when it announced that it was ‘in discussions with potential co-managers who could assist in and strengthen some or all aspects of the manager's current role and responsibilities, including identifying new lending categories, sourcing platform partnerships, conducting platform due diligence, structuring investments, portfolio management and back-office support’. This seemed to send a clear message that it was considering all aspects of the how the investment company would be run in the future.
Oaktree, which is seeking to appoint two new non-executive directors to the board, has been vocal about its views on the future direction of the fund, LIM Advisors less so although it is demanding the removal of the chairman Christopher Waldron as well as the appointment of two new directors. The board rejects these efforts as evidence that these shareholders are trying to impose their own views on the company.
The thrust of Oaktree’s argument is that Ranger has failed as a fund and therefore the best course of action is for it to opt for an orderly wind-down. The Ranger board has identified a new manager, Ares Management LLC, who it wants to implement a new investment strategy, which can loosely be described as investing in structured credit. To its detriment, the board’s recent announcement on this topic is woefully light on useful detail and this has not served to reassure investors in the fund. Ranger’s share price actually fell on the news.
Taking Oaktree’s proposal first, Ranger has 53 million zero dividend preference shares in issue which are not due to be repaid until 30 July 2021. The board has highlighted that this is an obstacle to an early liquidation of the fund. As funding goes, the zeros were pretty expensive when they were issued but the uncertainty around the quality of Ranger’s net asset value (NAV) has left them trading on an even higher gross redemption yield. Regardless of what happens next, it would make sense for Ranger to be buying these back and cancelling them in my view, replacing them with bank debt if the fund is to carry on.
Oaktree makes a valid point that Ranger’s portfolio is reasonably liquid and, leaving the Princeton investments aside, could be turned into cash over 18 months with minimal fuss. The process could be handled by the existing management team at no additional cost for the first year and then perhaps at a reduced cost thereafter. Shareholders would gain as the discount was eliminated.
LIM argues that the zeros, which have a market value of around £56.7 million, should be repaid early once sufficient cash from the loans in its portfolio is available, allowing the listed fund to be wound down over two years.
The board’s alternative offers a more uncertain path to prosperity. Ares is a substantial asset management company and I think there might be demand for a fund investing in one or two of its credit strategies. However, it will take some time for it to reposition the portfolio and, in the meantime, there is nothing from the board about how the discount will be tackled.
I also feel quite strongly that when you make a substantial change to a fund – new manager, new investment approach and maybe (although it isn’t clear that this is the case) a new risk/reward profile – the board must allow an exit at or very close to NAV for any shareholder that wants one. If the board’s case for the ongoing fund is compelling enough, new investors may be found who are prepared to replace the exiting shareholders.
Trapping a substantial disgruntled minority of shareholders in a fund is not a recipe for long-term success. It might also put paid to any realistic hope that Ares has of making the company bigger.
James Carthew is a director at Marten & Co, operator of the QuotedData website. The views expressed in this article are his and do not constitute investment advice.