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Trust Insider: events are forcing Marwyn to address its deep discount
by James Carthew on Sep 10, 2013 at 00:01
There have been fun and games in one of my larger investments this week, Marwyn Value Investments (MVI).
In its current form MVI is an odd investment and has a history too complicated to go into here. Suffice to say, its management team have a reputation for creating innovative corporate structures and over the years they have created, merged, listed and delisted various vehicles. This can make the story quite confusing for some potential investors.
However, I quite like the basic idea behind the fund. The nub of it is that they inject equity into quoted shell companies. They recruit experienced management teams to run these – each of which specialises in a particular niche – and operate a ‘buy and build’ strategy to create a larger company that can then be sold on for a decent profit.
Over the years they have done this successfully in a diverse range of industries but there have been some failures too.
The Marwyn team have been managing money this way since 2004 and launched the first quoted fund in 2006. Their problem was that investors in the first fund did not want new investors diluting their interest in the portfolio. So if they were going to grow their assets under management, they had to raise money for separate funds.
This is a problem faced by most private equity companies. Quoted equity funds can get round the problem by issuing C shares, investing the proceeds of the C share issue to create a near identical portfolio to the original fund and merging the two pools.
The original investors do not have to bear the costs of acquiring the portfolio and their returns are not diluted by large cash balances (cash drag). A private equity fund, though, cannot usually buy any more of the companies they are invested in and so fresh cash is deployed in new assets.
Investors that owned a nice collection of mature investments suddenly find their interest in these diluted and they are now part owners of a mix of cash and immature investments which, because the adage ‘lemons ripen first’ seems to hold true for private equity portfolios, could be riskier than the mature portfolio.
Back in 2002, worries about cash drag prompted a peer private equity trust, Pantheon , to go down the route of signing up institutions to make commitments to buy participating loan notes – some of these commitments had a fixed term and some were open-ended. In return for the commitments, Pantheon paid these investors 0.5% per annum.
This was not a bad solution to the cash drag problem but there are only a limited number of investors who can make this kind of commitment and it does not solve the problem of the new portfolio being mixed with the old one.
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