In my most recent MoneyWeek column – looking at the PSSL affair – I noted that the great strength of the investment trust industry is its reliance on experienced boards of non-executive directors. By and large these boards try damned hard to fight for their investor’s best interests and usually make the right decisions – even if they are sometimes a bit controversial.
That does not mean though that these fund boards always make the right calls, which brings me to UK Mortgages Ltd. Even before the current events this innovative fund was a huge disappointment. On paper it should be an excellent alternative investment, offering tangible diversification from mainstream assets. Despite the relentlessly optimistic tone from some fund analysts, the truth is that UKML has serially under-performed, most of the time not covered its dividends, and generally been late hitting most strategic targets. Unsurprisingly the fund has traded at a big discount, which even now stands at around 20%.
So, I thought that the putative bid from M&G Specialty Finance Fund SCSp looked like a sensible way out of the whole rather underwhelming affair. The news this morning that M&G had actually raised the bid to 70p a share – up 3p from last month’s indicative bid – was even more heartening. According to a morning note from fund analysts at Liberum this offer price represented a 26% premium to the share price prior to the announcement of the first bid and an 11.9% discount to the May NAV. That said, adjusting the bid for the imminent return of capital (of £30m), the discount rises to 13.8%.
If I’m honest, in the current economic climate accepting the bid looked more than sensible, especially given that we have a deep recession looming in 2021 plus the very real likelihood of a housing slump next year. My rough finger in the air estimate is that an offer for a debt fund at anything between a 5 and 15% discount to net asset value deserves very serious consideration, and long, careful debate.
Not so, it seems. The board comeback within just a few hours is as follows: “The Board continues to believe in the quality of the assets in the Company’s portfolio, the robustness of the Company’s Net Asset Value methodology, as well as the quality of the investment management services provided by TwentyFour Asset Management LLP. The Board believes that the terms of the Final Possible Offer continue to undervalue the Company and its prospects. The Board does not believe this valuation is recommendable to Shareholders and therefore sees no basis for engagement on this Final Possible Offer.”
Instead the board is pushing ahead with a strategic review and Liberum analysts reckon the fund will probably return capital to shareholders following refinancings or asset sales. Maybe that will all work out. I have my doubts but I wish them luck. The cynic might also add that the bid was probably unlikely ever to be successful as the funds’ managers TwentyFour, in part through a sub fund managed for SJP, and via other direct holdings, had something like 20% of the shares.
I think the Liberum analysts are spot on when they say that if the revised bid is rejected on the same grounds – which the board has now done – “we believe the board should give further information on what it believes the true value of the portfolio to be in the current market.” Quite. Lets hope that true value is well above 70p a share!