At the beginning of July 2017, Sherborne Investors C (SIGC) raised £700 million to ‘realise capital growth from investment in a target company identified by the investment manager with the aim of generating a significant capital return for shareholders.’ The target company would be quoted and the manager would consider it ‘to be undervalued as a result of operational deficiencies and which it believes can be rectified by the investment manager’s active involvement.’
A flurry of announcements followed the successful fundraise identifying some of Guernsey investment company’s backers – institutions such as Fidelity, Aviva and Invesco. Numis Securities, which had helped them raise the money, was confirmed as corporate brokers and then things went very quiet.
Four months on and there is little indication as to what the target is. The issue expenses were reckoned to be about £11 million which would put the opening net asset value (NAV) at around 98.4p. The shares are trading at about 106p today and have been at a premium since launch, not that many have been traded.
The last fund, Sherborne B (SIGB), launched in November 2012 with £207 million of gross issue proceeds. Again, there was a period of radio silence (about three months) before it revealed that the intended target was 3i (III). In the end though, about a year after it had launched, the opportunity in 3i went away and the manager decided to switch its attention to Electra Private Equity (ELTA). That fund’s manager was fired, the portfolio dismembered and much of the proceeds returned to shareholders. The first target (for Sherborne A) was F&C Asset Management. Who might be in the firing line this time?
Firstly, £700 million is a lot of capital to deploy in one target. Remarkably, perhaps, shares in many of the largest investment companies are actually trading at premiums above their asset value and so there is no value to extract.
Moving down the scale, Templeton Emerging Markets (TEM) on a discount of over 11% and a market value of £2.2 billion does not probably present a tempting enough target even with £286 million of untapped value available to be extracted. Carlos Hardenberg, the fund manager who succeeded Mark Mobius two years ago, has done a great job in improving performance. Over the past year, its NAV returns are 11% ahead of the next best global emerging markets trust, which should help narrow its discount in time.
Caledonia (CLDN), the family investment vehicle for the Cayzers, has untapped value of £317 million. Its NAV returns are towards the bottom of the Global pack over the past three years. The family does not always act with one voice, although you would have to go back to 2004 to spot any public dissent. Given the large family stake, any corporate raider might place Caledonia in the ‘too difficult’ pile and move on.
Caledonia’s long-term approach to managing money on behalf of the family means that investments may take time to come good. As an example, Caledonia recently booked a sizeable profit by selling its 100% interest in the Sloane Club, 26 years after it first invested in it. Given its substantial unquoted investment portfolio, it might be better to compare it to funds in the Flexible Investment sector. There its returns would look a lot more respectable.
Fidelity China Special Situations (FCSS) could offer £183 million of untapped value with a 12.5% discount that may reflect investors’ nervousness over whether its stunning run of performance can continue. It seems an unlikely target for Sherborne.
As you continue to move down the market cap scale, the potential uplifts available don’t look a lot more attractive. Aberforth Smaller Companies (ASL) £181 million; Riverstone Energy (RSE) £213 million; Harbourvest Global Private Equity (HVPE) £178 million; Pantheon International (PIN) £222 million; none of these funds are on particularly meaningful discounts and any attempt at stake-building could bring their discounts rattling in quite fast in any case.
Of course, the intended victim may not be a traditional investment company. There is substantial value available in some of the older real estate investment trusts (Reits) – the likes of British Land (BLND) and Hammerson (HMSO) maybe offer billions in untapped value, at least on paper, but you’d have to be very brave. Indeed, the intended target may lie outside the investment company sector altogether. As with Sherborne A (SIAG), the target may have been an asset manager but there has been a fair bit of M&A activity in that area recently that could have removed the opportunity.
Either that or the whole investment thesis might be gambling on taking advantage of a shakeout in the market. It is going to be fascinating to see what the target is and how things play out. The prospectus says that the manager has until the end of 2018 to pick a target otherwise the cash will be handed back. At least the manager isn’t taking a fee on the uninvested cash, although for some bizarre reason it is paying £70,000 a year to licence the Sherborne name.