My MoneyWeek column last week looked at the messy wrangles currently pre-occupying the boards at two investment trusts, Ranger Direct Lending and Invesco Perpetual Enhanced Income.
Yesterday brought news on both fronts. Let’s start with the excellent news at Ranger.
At long last, the board have seen sense and decided to ditch the Ares proposal and wind down the fund. Numis reports that the Board has concluded that in the interests of protecting shareholder value the company should “move to realise its assets in an orderly manner”. This follows Ares expressing doubts about taking over the mandate.
Slightly oddly the Board also announced that it still recommends voting against Oaktree and LIM’s resolutions at the AGM on 19 June even though they are asking for a wind up as well. It was also disclosed that the Board continues to believe that “a majority of shareholders are supportive of the merits of the Ares proposition”.
I can’t say I blame Ares for walking away, It’s clearly a well-respected asset manager but many of us had real doubts about its ability to manage a portfolio of specialist direct lending to small and mid-sized businesses. There was also the reality that at least 30% of the shareholders wanted an exit.
So now we move on to the wind-up process which I think will take a substantial amount of time. Numis observes that “at 31 December 2017, $247.0m of Ranger’s assets were considered “current” in status and had an average remaining term of 14 months, the $3.7m of “late” loans had an average term of 19 months”.
The shares currently trade at a 19% discount to NAV but this falls into single digits if we assume that the Princeton position is worth zero. Which I think is a fair assumption – at least to anyone who wants a realisation event this decade.
My own rough guess is that not all the stated NAV will actually be realised, even in a lengthy realisation process so my finger in the air guestimate is that the realisable NAV is probably closer to between 850p and 890p. The share price bounced up past 810p but I think it’ll drop back once investors wake up to a) the timescale and b) smaller final returns. I wouldn’t be surprised to see the share price bounce back down towards 780p at which point I think they’d represent slightly better value. The zero’s might be a slightly better bet as they’ll be cashed out on what I suspect will be favourable terms in order to expedite the cleanup operation. My guess is that they are a better buy at today’s price of 109p, but very illiquid with few sellers.
Over at IPE – Invesco Perpetual Enhanced Income the battle is intensifying ahead of an EGM on 20 July. There are resolutions to remove two directors: Donald Adamson (Chairman), and Richard Williams (Chairman of the Management Engagement Committee), and two appoint two new directors, Hazel Adam and Howard Myles. As many of us suspected Invesco have confirmed that the row was not only about fees but also “concerns about Board governance”. Numis reports that Invesco thought the board was “overly aggressive” in the fee negotiations, serving a 48 hour ultimatum, and attempting “to insert additional, material changes to the investment management agreement that had not previously been discussed”. Invesco confirms that prior to its resignation, it had already agreed to cancel the performance fee and to reduce the annual management fee (albeit that it was in favour of keeping the performance fee)”.
The IPE board has hit back with its own circular which states that it “has behaved correctly” in attempting to renegotiate fees with Invesco and then initiating a “competitive and fair process for a new investment manager when Invesco chose to resign”. However, it is “now being pressured by a very large asset manager” in a “cynical attempt to use concentrated voting power against retail investors” who constitute the majority of the share register. The Board believes the Requisition is “an attempt to subvert the rights of the independent Directors to run the Company in the best interests of Shareholders”.
Personally, although I have some sympathy for Invesco’s position – it had done a good job – I’d be voting with the board simply as a matter of principle. I’m also deeply worried about its attempt to remove the directors which strikes me as overly vindictive. I think the move to renegotiate fees was entirely reasonable although one has a suspicion that the process might not have been handled brilliantly. It’s also clear that other investment management groups seem eager to bid for the mandate – assuming Invesco doesn’t try and grab back control.
Overall, I’d argue that neither side comes out of this slightly sad affair smelling of roses but the row does present an opportunity for income-based investors. The funds’ managers have delivered an NAV total return of 102.2% over the past decade versus 64.2% and 78.0% for the IA High yield and IA Strategic Bond sectors, respectively. Crucially the shares have fallen significantly since Invesco’s resignation, and are currently trading at a discount to NAV of 0.8% versus a premium of c.9%. That strikes me as a potential opportunity to buy back into a well-managed portfolio of bonds at a reasonable price. The running yield is now closer to 6.8% per annum which strikes me as a reasonable number, as long as the new managers are up to scratch.