Boards of investment trusts are looking to sell quickly and at a discount

Investment trust boards appear to be too quick to support opportunistic offers as a result of ongoing discounts

An investment trust's net asset value, or NAV, is meant to reflect what would remain after all of its assets were sold and all of its debts were settled. Trusts that invest in liquid, large-cap listed stocks should see a NAV that is fairly close to what they would actually receive. You would hope that it is a fair representation of what you would ultimately receive if you were not a forced seller, but if you were selling large stakes or liquidating quickly, you might receive less for small-cap funds.

Funds that make investments in unlisted assets, such as infrastructure, real estate, private equity, and so forth, are distinct. Since the assets' market price is not constant, other data is used to determine the NAV. These could be the prices at which similar assets have sold, recent private transactions for stakes in the same assets, net present value calculated using forecast cash flows discounted back to the present, or some other technique.

NAVs are therefore estimates for these funds. However, in the event of a non-forced sale, one would hope to find that the assets should be worth near NAV (or better), unless the manager or board is informing investorsas can occasionally occur when a troubled trust is winding upthat they are no longer confident of achieving these prices.

Offers that are lowball.

Therefore, it is annoying to see numerous bids in industries like infrastructure and real estate that are made at a large discount to NAV but are nevertheless approved by boards. Since many of these funds are trading at a discount, buyers are making offers that are higher than the going rate but still lower than NAV. Despite the desire of many shareholders to stay involved, boards occasionally appear to be too quick to support lowball buyout offers.

As an example, consider the fight for Assura, which has triumphantly returned to support a merger with its rival Primary Healthcare Enterprises.

It appears less likely that this week's bid for Downing Renewables and Infrastructure (LSE: DORE), which I own, will be successful. The board has accepted DORE's bid of 102p per share. This is 7 points and 5 percent less than NAV (adjusted for the next dividend), but it is a 23 percent premium to the undisturbed share price. With net assets of 191 million, DORE is small, and given the size of the discounts, consolidation in renewable energy is unavoidable. However, considering that the trust seems to have a respectable asset portfolio and to be doing reasonably well, a sale this much below NAV feels like a bad deal.

The bidder, Bagnall Energy, an inheritance tax relief investor managed by Downing, the DORE manager, is what complicates matters. After investing in DORE since its IPO, Bagnall raised its ownership from 16 percent in early January to 25 percent by the middle of February. A competing bid is unlikely because of its increased stake, which grants it a blocking vote on other bids. It is infuriating to witness a large shareholder purchase the entire company for less than NAV (no control premium). The fact that the manager has been receiving fees based on higher NAVs while claiming that it is worth less when it wishes to purchase is unacceptable. Furthermore, the board's assertion that this offer is "in the best interests of DOREs shareholders as a whole" is not convincing. Long-term investors are likely to disagree.

Downing Renewables & Infrastructure's share price in pence is displayed in a line graph.