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.
It must be disappointing to be targeted just as they thought the fund was back on an even keel but a healthier fund is easier to break up.
Given the dismal history, there are probably shareholders other than Ironsides that would like an exit.
Perhaps though, if the management can convince investors that the outlook for this business in its new form is attractive, it should be thinking about trying to raise money to replace the outgoing shareholders. With existing assets just over £32 million however, it would probably need to raise more money than they return to justify keeping the fund going.
Castle Private Equity
Castle Private Equity is a $641 million (£404 million) Swiss-listed private equity fund. At the end of December 2011, its discount had widened to over 30%, which is almost $200 million of value waiting to be extracted.
Again, Robert Knapp’s name crops up as a protagonist – Ironsides is working alongside Abrams Capital and he is one of a slate of new directors proposed to replace the existing board. The two activists have over 25% of the company between them.
Castle has been under pressure for some time and the board had conceded a suspension of investing activity and decided the best way forward was to covert to an open-ended fund with quarterly liquidity at NAV – in my view, a daft idea for a fund with illiquid assets, and one that had already been rejected by Swiss regulators in 2009.
Also in the news, we have a decision by Signet Global Fixed Interest to accelerate its redemption timetable.
After triggering another continuation vote by trading wider than a 5% discount, it has said it proposes starting the process of realising the portfolio now. It has taken in specie redemptions from its underlying funds and is ready to start liquidating the portfolio. Again, the register has some activist investors on it, notably Boston-based Weiss and Laxey.
In the emerging markets sector we have a string of tenders taking place, mostly initiated in response to pressure from City of London who dominate the share registers of most of these funds. While this produces a useful short-term gain for the activists it is shrinking their investable universe.
To my chagrin, one fund where there is definitely no corporate activity taking place now is Marwyn Value, where talks on the future of Entertainment One have ceased. Marwyn’s shares are still on an attractive discount but I will have to be a little more patient before the value is unlocked.
James Carthew is a former director of Advance UK trust