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Sherborne: we could boost Electra shares by £1bn

Sherborne Investors claims it could more than double the share price of Electra Private Equity to £60 if shareholders back it at the EGM.

 
Sherborne: we could boost Electra shares by £1bn

Edward Bramson (pictured), a partner at Sherborne Investors (SIGB), has strongly criticised the management and track record of the £1.4 billion Electra Private Equity (ELTA ) investment trust.

Sherborne has built a 20% stake in Electra, and is seeking to overhaul its board and approach with a strategic review. In a letter to Electra shareholders Bramson suggested the investment trust's share price, which trades at 14% discount to net asset value, could reach £60, compared with £27.50 today, if his proposals were implemented.

‘Although Electra’s investment performance has been in decline for a number of years, Sherborne Investors believes that, with certain changes in approach, the aggregate value of shareholdings in Electra could be increased by more than £1 billion with lower risks and less volatility than under the current strategy,’ argued Bramson.

He challenged Electra’s board on the grounds of the fund’s performance, costs, and director experience.

Sherborne said that Electra typically quoted its performance with reference to the FTSE All Share, which he described as inappropriate given the trust’s emphasis on smaller companies. ‘Electra’s investment portfolio would have failed to beat an investment in a relatively simple and inexpensive FTSE 250 tracking fund in each of the last seven years,’ warned Bramson.

For example, in 2013 Electra returned 11.7% in net asset value terms, lagging the FTSE 250’s 30.5%.

Sherborne also complained that over the past five years, two-thirds of private equity funds of similar size dating from 2009 produced better returns than Electra. ‘The major reason for this underperformance appears to be that as successful investments, made by the company 15 or more years ago, were disposed of, the investments that replaced them were substantially less attractive,’ suggested Bramson.

Sherborne’s analysis further indicated that Electra had failed to improve the fortunes of its underlying businesses. It said the average company in the fund’s portfolio saw operating expenses rise by 8.6% and operating profit margins decline by 29.6% under Electra’s supervision. By comparison, Sherborne claimed that with its own investments average operating expenses fell by 25.1% and margins jumped by 237.8%.

Secondly, Bramson criticised Electra for gearing up its balance sheet with the issuance of £147.5 million of zero dividend preference and convertible shares after the financial crisis. It had not invested this money, incurring shareholders with an annual interest bill of £20 million for no return.

Thirdly, Sherborne argued Electra's investment expenses were high and had absorbed more than 42% of the total return on its investments in the past five years. It calculated this had eroded around £275 million from the trust's net asset value over the period. ‘These expenses create a very significant burden on returns to shareholders,’ Bramson commented. ‘We believe that the strategic review should establish a framework for appropriate levels of investment expenses for the future as a means to improve the returns earned on shareholders’ capital.’

Finally, Bramson attacked the composition of Electra's board, saying although is non-executive directors had 'admirable credentials' in law, accounting, financial services, government and consultancy, they lacked the commercial experience that he and Sherborne co-director Ian Brindle would bring if elected at the extraordinary general meeting on 6 October 2014.

Shares in Electra added 9p to £27.40 as analysts said Sherborne had made some good points, although they said they wanted to see more of the data behind the analysis of operational performance.

Analysts at Investec Securities said the letter provided 'a sensible basis for discussion' between Sherborne and Electra, which has urged shareholders to reject Sherborne's proposals.

Charles Cade of Numis Securities said Sherborne's criticism of the expensive debt Electra had taken on was valid, particularly as the money raised had largely sat in cash. He also agreed there was scope for Electra to cut its fees. Electra charges a base fee of 1.5% of assets including cash, while other private equity funds tend to charge on money invested, he said.

While Sherborne's 20% stake left it short of a simple majority at the vote, Cade noted that several of its largest shareholders were investors in Electra and could back Bramson, who successfully turned round F&C Asset Management. 'As a result, the EGM on 6 October looks set to be an interesting event,' he said.

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