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IT Insider: how to profit from the big private equity arbs
by James Carthew on Feb 27, 2012 at 00:01
A couple of aggressive moves by activist investors caught my eye last week. CQS Rig was requisitioned by Ironsides and Castle Private Equity succumbed to pressure from shareholders and agreed to shift into portfolio realisation mode – an increasingly common state of affairs within the private equity sector.
Discounts for the sector as a whole are not particularly out of line relative to history – at the end of 2011 Numis had the London-listed funds trading on an average discount of 12.9%.
There was though considerable disparity in the ratings of the various sub-sectors – alternative funds and private equity in particular fell out of favour in 2011 and so perhaps it is unsurprising that they are being targeted now.
CQS Rig listed at £1 in December 2006. The idea of the fund was fairly straightforward. It would finance the construction of drilling rigs and use gearing to bolster its yield (aiming for 8%).
It ran into problems when the credit crunch hit – the oil price fell and with it demand and day rates for rigs. Several of the companies they had lent money to filed for bankruptcy.
The net asset value (NAV) turned negative. It was a penny stock for a while but the chief executive of CQS lent the company enough money to survive the downturn and since then it has been on a recovery track. Maximum permitted gearing has been reduced from 150% of the portfolio to 30%, hitting the potential yield but making the fund more robust.
Ironsides, the activist fund associated with Robert Knapp (ex Millennium Partners, who famously had a go at British Empire ), built up close to a 20% stake in the company. Its requisition asks that investors who want to get out are given the opportunity to do so as near as practical to the NAV (currently around 33.5p versus a 30p share price).
I believe it built up most of its stake over 2010 and 2011 at prices ranging from the high teens to the early twenties, before a boost in the NAV last October when CQS Rig recovered a substantial chunk of the money it was owed by one Norwegian company, FPS Ocean.
The management has been working to improve the utilisation rate of the remaining fleet and now feels confident enough to promise a 5% dividend yield on NAV.
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