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Electra cuts charges and coughs up dividend

Investors left Electra Private Equity trust in no doubt what the price of their loyalty would be after the clash with a leading shareholder.

Electra cuts charges and coughs up dividend

(Update) Electra Private Equity (ELTA ) investment trust will pay its first ordinary dividend in 16 years and slash £11 million off annual expenses to reward shareholders who backed it against an attempted coup by Sherborne Investors last year.

The £1.1 billion million private equity fund last October promised to review its fees, capital structure and distribution policy when shareholders rejected an attempt by Sherborne, the trust’s biggest shareholder, to gain seats on the board and push through a strategic review.

Today was payback time as chairman Roger Yates said the trust would declare an interim dividend at its half-year results in May. Excluding three special dividends in 2006-08, this will be the first regular dividend the company has paid since 1999.

In future ELTA will seek to pay 3% of net asset value to shareholders each year. This will be either through cash dividends or share buy-backs. Yates reassured investors that a dividend was the preferred option. ‘We think it’s right that shareholders should receive a regular return of capital and while the trust is trading at a modest discount it would make sense to pay that as a dividend,’ he told Citywire.

The trust is also cutting what it pays its manager Electra Partners and reducing finance costs.

As part of this the annual management fee, which had applied to gross assets, will no longer apply to cash, of which it has accumulated £94 million after a series of disposals. While the AMC remains at 1.5% for the core investment portfolio it falls to 1% for a small amount of 'non core' holdings in listed companies and other funds. All this saves £7 million a year.

It will also repay a £154 million overdraft and in future will only use a £275 million multi-currency credit facility to temporarily fund new investments. This will save £4 million a year but will leave a fifth of the portfolio unhedged and exposed to currency movements.

Lastly, it will repay £168 million of zero dividend preference shares and convertible bonds when they mature in the next two years and will not take on any new long-term debt. 

Tough talks

Shareholders had left the board in no doubt that they wanted a cleaner, simpler and less expensive way to access private equity, said Yates (pictured). ‘I am pleased that the board has concluded its review which has rightly involved tough and rigorous negotiations,’ he said in statement.

‘We believe the new agreement with Electra Partners delivers improved value for all of our shareholders, while also keeping sufficient incentives and the financial means to continue our successful investment strategy,’ Yates added.

Under the revised terms, Electra Partners will continue to receive a performance fee of 18% of net profits on direct private equity investments and 9% of net profits from holdings in investments in other private equity funds. These kick in if ELTA’s annual portfolio return exceeds 8%. Although large by the standards of retail fund management, analysts say this level of ‘carried interest’ in companies the trust invests in is actually slightly below average in private equity.

Sherborne stalemate

Analysts welcomed the changes and the shares edged 6p higher to £30.27. There was concern, however, that ELTA faced a stalemate with Sherborne, which last year claimed it could increase the trust’s share price to £60. Sherborne, led by Edward Bramson, has lifted its stake from 20% to 24% making it difficult for the Guernsey-based investor to back away.

‘Sherborne is likely to make its views known at some point, having increased its stake, but in our view it will be difficult for it to quarrel with the outcome of this review with much credibility given its own fee structure,’ said Christopher Brown, analyst at ELTA’s broker, JPMorgan Cazenove.

Charles Cade of Numis Securities, said while Electra had the support of other shareholder, Sherborne had a potential blocking vote. ‘In our view, the board’s review has not resolved this situation, and some form of more radical action may be needed in the long term.’

In recent years the trust’s performance has been good, second only to 3i in the direct private equity sector. Partly thanks to Sherborne’s interest, shareholders have enjoyed three-year total returns of 84% more than double the net asset value return of 40.5%. The shares trade at a discount to NAV of under 6%, way below of its peers which stand on discounts between 15% and 46%.

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