Investment Advice

For trust investors, these three offers are bad

By Terry Tanaka 20 Sep, 2025
For trust investors, these three offers are bad
According to Terry Tanaka, small shareholders in related-party transactions require protection

The fact that small shareholders' interests generally coincide with those of large shareholders is a positive feature of capitalism. The professional and amateur investors split the profits or losses when they purchase stock in the same company as a much larger organization or affluent individual. Although they may have more voting power and strategic influence, a majority shareholder cannot take money away from smaller shareholders in order to enrich themselves. Although it isn't always the case, this is typically the case.

Three transactions in the investment-trust industry in 2025 seem to have abused the power of big shareholders or related organizations to the detriment of smaller investors. This always happened when a shareholder or related entity was involved in a transaction on both sides.

Because many trusts are currently trading at a significant discount to their net asset value (NAV), these transactions raise concerns about the sector's governance and the fair treatment of minority shareholders. All were compliant with the proper protocol and did not violate any laws or regulations. However, it's easy to understand why investors might interpret them as evidence that the system favors big businesses and affluent people. I think that's unhealthy.

"A warning to boardrooms of investment trusts."

Dan Loebs Third Point Investors (formerly LSE: TPOU and currently LSE: MLHL) is the most frequently criticized example. All of the trust's assets were invested in Loeb's flagship Third Point hedge fund, which served as a feeder fund. It revealed plans earlier this year to reverse takeover Malibu Life, a reinsurance vehicle that Loeb also created, in order to turn it into a reinsurer.

It only provided investors who were not interested in this novel approach with a partial tender offer at a discount to NAV. It would not have been possible for management to win a vote on this plan in August without the support of Loeb-controlled shares and the "VoteCo" funds.

A VoteCo is a legal entity created to hold a block of voting shares, which guarantees that the fund will be a foreign issuer under US securities laws. Its purpose is to vote in the best interests of all common shareholders.

The Financial Conduct Authority loosened the regulations last July, which would have prevented Loeb from voting on his shares in the deal at all.

Shavar Halberstadt, an analyst at Winterfloods, stated, "We suspect this deal will live in infamy, a cautionary tale across investment-trust boardrooms and shareholder bases for years to come." It is "far from best practice" to "trap shareholders in an incomparable vehicle despite their obvious opposition."

This behavior is particularly disappointing because Loeb is a successful activist who is well-known for pressuring management to act in investors' best interests.

Downing Renewables and Infrastructure (LSE: DORE) is a less exemplary but still inadequate example. The top shareholder, Bagnall Energy, raised its ownership of this trust from 16 percent to 25 percent in January and February when it was trading at a significant discount to NAV. After that, it placed a bid for the remaining shares at a premium to the undisturbed price but at a 7% discount to NAV. Inheritance-tax management tool Bagnall is operated by DORE manager Downing. Therefore, while Downing was collecting fees based on the current NAV, he also claimed that a bid below NAV was not worth that much. Additionally, keep in mind that Bagnall's increased 25% stake would provide it with sufficient leverage to thwart a rival bid.

Though it could have treated investors with more respect, Downing prides itself on being a "responsible investor, investing for a return, while caring for the world we live in." In the end, investors supported the agreement, with only 15% of votes voting against it. Bagnall could have raised the possibility of competing offers surfacing, though, if it had placed its bid sooner rather than increasing its stake first.

Optimizing value for additional shareholders.

Last but not least are Ocean Wilsons (LSE: OCN) and Hansa (LSE: HAN), which BFIA columnist Terry Tanaka recently covered.

As a shareholder in OCN, I am not as pleased with this result as Max. Following the sale of its 56 percent stake in Wilsons Sons Ports, OCN had £600 million in cash on hand in addition to a £341 million portfolio of primarily underperforming hedge funds and private equity. It had a book value of £940 million (699 million), or £1.50 per share.

At a price of 1,543p, or slightly more than 100 million, management announced that it would evaluate options to "maximise shareholder value" and issued a tender to repurchase 20% of OCN's shares. However, the next step was to merge with Hansa, which is under the control of William Salomon and the Salomon family, just like OCN. Arnhold, a US activist who opposed the deal, cited the market's response, which saw Ocean Wilson's shares drop 17% to just over 12%, and Hansa's share price increase by 20% as proof that Ocean Wilson's minority shareholders are losing out. It is difficult to understand why an OCN investor who did not also own Hansa would support the merger at such a significant discount to NAV, especially since cash accounted for more than half of OCN's book value. According to results released last Friday, less than 24% of voting shareholders opposed the deal.

It's ironic that OCN has demonstrated no aptitude for fund selection, whereas Salomon may be skilled at obtaining value from minority shareholders. While the MSCI World index has increased by 2 to 6 times since June 2015, the value of its portfolio has increased by less than 40%.

Salomon would have had much greater success if he had heeded the advice frequently given to novice investors: purchase a cheap index tracker and avoid assuming you are better than others at beating the market. Walter Salomon was one of the last great European bankers and Salomon's father. Although Walter's wealth was passed down, it doesn't seem that the scion inherited his father's business sense.