Get­ting to grips with in­vest­ment trust ten­der of­fers

We ex­am­ine why in­vest­ment trusts go down this route and what it means for share­hold­ers

Shares - - INVESTMENT TRUSTS -

Ten­der of­fers are an un­ap­pre­ci­ated at­trac­tion to own­ing in­vest­ment trusts. In­vestors – par­tic­u­larly in­sti­tu­tional ones like as­set man­agers or pen­sion funds – like them be­cause they pro­vide com­fort that they will be able to sell a stake in the trust with­out hav­ing to worry about mar­ket liq­uid­ity (namely whether some­one wants to buy the shares from them).

A ten­der of­fer is an in­vi­ta­tion by an in­vest­ment trust for in­vestors sell them some or all of their hold­ing. The event of­ten hap­pens once a year.

In or­der to in­cen­tivise hold­ers to sell their shares, these ten­der of­fers are typ­i­cally pitched higher than the cur­rent mar­ket price of the shares. More specif­i­cally, ten­ders are priced at a level which is bet­ter than the dis­count to net as­set value (NAV) at which a stock might be trad­ing.

Ac­cord­ing to data from in­dus­try body the As­so­ci­a­tion of In­vest­ment Com­pa­nies, 25 trusts car­ried out ten­der of­fers in 2017.

DEAL­ING WITH DIS­COUNTS

In­vest­ment trusts can trade at a premium or dis­count to their NAV, or to­tal as­sets mi­nus any debt. Whether they trade at a premium or a dis­count will de­pend on how pop­u­lar said trust is with in­vestors.

If a trust per­sis­tently trades at a dis­count it might look to ad­dress the is­sue and a ten­der of­fer is one of the meth­ods em­ployed.

For ex­am­ple, in­vest­ment trust

Ge­n­e­sis Emerg­ing Mar­kets (GSS)

re­cently bought nearly 13.5m of its own shares back from in­vestors (3 Sep) as part of a ten­der of­fer it launched in July 2018.

Ge­n­e­sis of­fered to buy back 10% of its shares at a dis­count of 3.5% to NAV com­pared with an av­er­age dis­count to NAV for the share price of 11% over the pre­ced­ing five years.

Some­times a ten­der of­fer will be launched in re­sponse to pres­sure from ma­jor share­hold­ers, or a trust might have an ex­plicit pol­icy of launch­ing a ten­der of­fer if the dis­count gets too wide.

This is known as a dis­count con­trol mech­a­nism or DCM, al­though the vast ma­jor­ity of DCMs are dis­cre­tionary so trusts are not com­pelled to fol­low them to the let­ter.

WHAT ARE YOUR OP­TIONS?

When faced with a ten­der of­fer, share­hold­ers have the op­tion of ten­der­ing more shares than the trust has of­fered to buy. If other share­hold­ers have ten­dered less than their ba­sic en­ti­tle­ment then what­ever is left over can be split be­tween those ten­der­ing more shares.

In the case of Ge­n­e­sis, the of­fer was heav­ily over­sub­scribed and, in the end, more than half the com­pany’s shares were nom­i­nated for sale. Ge­n­e­sis re­sponded by of­fer­ing to buy a fur­ther 2.6% of ten­ders above the 10% level.

Ac­cord­ing to the in­vest­ment trust team at Nu­mis this would re­sult in 12.4% of shares be­ing re­pur­chased for those hold­ers who ten­dered their en­tire stake.

Ge­n­e­sis has also said that if the per­for­mance of the trust on a net as­set value ba­sis does not beat its bench­mark over the five-year

pe­riod to 2021 the com­pany will un­der­take a fur­ther ten­der of­fer for 25% of its shares.

LIQ­UID­ITY IS­SUES

Among the draw­backs of a ten­der of­fer is that it in­volves us­ing cap­i­tal which could oth­er­wise have been in­vested and, by re­duc­ing the size of trust, it can un­der­mine liq­uid­ity and ul­ti­mately make the fund un­vi­able.

This was a prob­lem faced by Black­Rock Emerg­ing Europe

(BEEP) af­ter it saw its own 100% ten­der of­fer in June met with over­whelm­ing de­mand.

More than 60% of its shares were ten­dered for sale, po­ten­tially re­duc­ing the as­sets in the fund to just £48m.

This was be­low a £75m thresh­old the com­pany had out­lined be­fore launch­ing the of­fer. It was there­fore scrapped.

The com­pany an­nounced an al­ter­na­tive plan on 17 Au­gust of liq­ui­dat­ing the trust and giv­ing share­hold­ers the op­tion of re­ceiv­ing cash at net as­set value mi­nus costs or rolling their shares into a new class of shares in Black­Rock Fron­tiers In­vest­ment Trust (BRFI).

EMERG­ING MAR­KETS DOM­I­NATE

Aberdeen Fron­tier Mar­kets’

(AFMC) shares per­sis­tently trade at a wide dis­count to NAV and it an­nounced in July that it would launch a ten­der of­fer for 15% of its shares at 98% of the pre­vail­ing net as­set value.

Win­ter­flood’s an­a­lyst team note: ‘Eq­ui­ties in emerg­ing mar­kets have un­der­per­formed their global eq­uity coun­ter­parts in three of the last five years and, un­sur­pris­ingly, the dis­count for the emerg­ing mar­kets in­vest­ment sub­sec­tor has lagged that of the wider sec­tor in this pe­riod.

‘It is against this back­drop that £393m of cap­i­tal has been re­turned from the sub­sec­tor since the start of 2016 through ten­der of­fers and buy­backs.’

Al­though a ten­der of­fer is one of the tools avail­able to a trust, in the long run it needs to come up with the goods in terms of per­for­mance and mar­ket it­self bet­ter if it wants to shake off a lin­ger­ing dis­count.

No­tably Ge­n­e­sis Emerg­ing Mar­kets pledged to in­crease mar­ket­ing to ex­ist­ing and prospec­tive in­vestors along­side its of­fer. (TS)

In­vestors have been ea­ger to take up ten­der of­fers in emerg­ing mar­kets funds

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