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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
For various reasons (for example, the illiquidity of their underlying investments or the uncertainty over their valuation) private equity funds often trade at a discount but investors, rightly, object to raising new money at a discount.
For example, Better Capital’s idea to tackle these issues was to create new cell companies (discrete portfolios of private equity investments) on a regular basis. This is essentially the same approach Marwyn was using and I quite like this structure.
However, I am not sure whether Better Capital intends to stick to this approach. Recently, rather than creating a 2013 cell, they persuaded investors in the 2012 cell to extend its investment period and allow in fresh capital. They were helped in this by the 2012 cell trading at a premium.
Better Capital has at least been raising meaningful amounts of money. Part of Marwyn’s problem was some of its investment vehicles were too small – this was largely a timing problem.
The thing about raising money is when you want it most (when assets are out of favour and cheap) investors can be disinclined to hand it over. Marwyn found this at the end of 2008 when it tried to launch Marwyn European Distressed Opportunities fund to take advantage of the situation. Had it been successful, there is a good chance it would have been a success.
In 2008, MVI was very much out of favour. Many forced sellers (mostly hedge funds with large redemptions) drove its share price down to ridiculous levels.
I bought MVI’s shares because I expected its discount to narrow as its portfolio matured. Although I like the Marwyn team, I was not much interested in the MVI vehicle making new investments and Marwyn promised in 2009 that the LP would not do this.
However, on 27 August, Marwyn proposed that the LP start investing again. To reassure those investors in MVI who want to take cash out of the fund at net asset value (NAV) rather than have it invested in a new portfolio, when assets are sold 50% of the profit will be returned to them via share buy-backs or some other method.
Shareholders will also be offered an exit at NAV in 2016 and at five yearly intervals thereafter.
However, unless the discount narrows significantly, MVI will not be able to raise new capital without diluting the NAV. I hope this means Marwyn will now work on improving the rating of the fund. With the shares trading at 160p and the NAV at 226p there is a lot to go for.
James Carthew is director of Sapient Research
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on Dec 10, 2013 at 12:57