Electra Private Equity (ELTA), the investment fund controlled by activist investor Edward Bramson, has run into a tax row with retail investors after declaring a monster £1 billion special dividend.
Analysts and wealth managers say the £26.12 dividend per share to be paid in May could leave private investors holding the shares outside ISAs or pensions with big tax bills, particularly as the ‘ex-dividend’ date has been set at the end of the financial year on 6 April.
The huge payout to shareholders will mop up two thirds of the £1.4 billion cash pile Electra has accumulated in the past year from a series of disposals demanded by Bramson, who seized control of the board in 2015 and is currently its chief executive.
However, the decision to return the money as a dividend surprised Charles Cade at Numis Securities. He said it would have been more tax efficient to structure it as a capital distribution, such as a tender offer or a compulsory share purchase.
‘As a result, we expect it to be taxed as income for UK retail investors, which is typically less efficient than a capital distribution (reflecting tax on dividends of 38.1% for an additional rate taxpayer versus a CGT rate of 20%),’ Cade said.
Cade said retail investors holding the shares outside a Sipp or ISA might be advised to sell them before their ex-dividend date on 6 April rather than suffering a tax charge on the dividend.
John Newlands, head of investment companies research at wealth manager Brewin Dolphin, said private investors were being disadvantaged.
‘From that point of view, therefore, while the ruthless agitators who have gained control of Electra’s billions have forced through NAV-[net asset value] enhancing manoeuvres faster than had ever been planned, they have chosen to turn a blind eye to the fact that certain private holders will now be faced by an avoidable tax hit.’
The ex-dividend date had infuriated wealth managers, Newlands said, as it would require them to sell their clients’ shares before the end of the current tax year, rather than using next year’s capital gains allowance, and forcing them to recalculate their tax liability for 2016/17.
‘Why has Electra picked this ex-dividend date? It’s almost as if they are trying to get everyone to sell on the same day,’ said Newlands.
He suggested it might be possible for investors to sell between 6 April and the end of April on a ‘special cum dividend basis’, allowing them to be paid a higher price but relinquish the right to the massive dividend.
Private investors are thought to account for only around 5% of Electra’s shares and it is likely the company chose the cheapest method it could find to return the cash, knowing that a minority of shareholders facing a potential tax bill would have time to sell.
The tax issues are not a consideration for the institutional investors who hold the bulk of Electra shares.
Sherborne Investors (SIGB), the Isle of Man investment fund run by Bramson, will receive nearly £300 million from its 29.8% stake in Electra.
Leading City fund managers such as M&G, Aviva and Invesco will also share in the windfall both directly through stakes in Electra and indirectly as backers of Sherborne.
Soros Fund Management, the investment firm founded by George Soros (pictured), the financier famed for ‘breaking the Bank of England’ and forcing the UK’s exit from the European exchange rate mechanism on ‘Black Wednesday’ in 1992, will receive a slug of the dividend too. It owns 1.6% of Electra and 5.2% of Sherborne.
M&G, the investment arm of Prudential and Electra’s second biggest shareholder with a 9.5% stake, according to Thomson Reuters data, will collect £95 million.
Aviva (AV), the FTSE 100 pension provider that has upset the global investment trust sector by selling long-standing stakes in the likes of Witan (WTAN) and Scottish (SCIN), is another big beneficiary. It owns 3% of Electra directly and is a big backer of Sherborne with a 20% stake.
Similarly, Invesco Asset Management will cash in through a 6% direct stake in Electra and a 6.5% position in Sherborne.
The dividend row comes as Electra prepares to shed its 51-year history as an investment trust and become a corporate investor more in the mould of Melrose (MRON), the engineering buyout specialist.
Electra had been expected to make a big pay-out since serving notice on its fund manager Electra Partners last year. Now re-named Epiris, the fund manager is incentivised to exit as many of its investments as it can before stepping down in June.
It has made 13 disposals in the past year, generating £1.6 billion in cash, with £405 million from the sale of its stake in caravan operator Parkdean Resorts in December. Around £200 million of this was earlier returned to shareholders via a tender offer.
The demise of Electra – one of the UK’s first buy-out funds founded in 1976 and run for many years by Hugh Mumford – has shocked some observers. Although regarded as a well-run company with one of the best track records among private equity funds, Sherborne was able to build a stake in the company and force changes, such as improved dividends and a cut in changes.
The shares, down 25p or 0.5% at £50.05 today, have delivered a total return of 50% in the past year. Over ten years shareholders have enjoyed a 238.5% total return.