Saba Capital Management, an activist investor, may take action against more closed-ended funds in the UK
A few trusts are acting proactively.
New York-based activist investor hedge fund Saba Capital Management may be pursuing more UK-listed closed-ended funds ahead of the general meeting it requested with Edinburgh Worldwide (EWIT) shareholders.
Saba revealed on January 13 that it had written to the board of Workspace Group (LON:WKP), a real estate investment trust (REIT), on January 8th, pleading with it to move forward with a managed wind-down (a procedure in which the fund sells off its assets in anticipation of ceasing operations).
According to the letter, Workspace was trading at one of the highest discounts to net asset value (NAV) in the Sabas database of REITs45%.
Paul Kazarian, partner at Saba Capital Management, stated in the letter that "an increase in valuation has not been realised despite a stable operating platform and capable management team." Rather, the discount has solidified, indicating the market's lack of faith in the company's ability to generate equity value through long-term expansion or reinvestment. The "
Kazarian also emphasized structural barriers in the shareholder base and refinancing difficulties, particularly the fact that a small number of shareholders own a large percentage of the company's shares, limiting liquidity and impeding the potential for share value growth.
"If offered to a larger acquirer or acquirers with the resources available to maximize their cash flows, reduce their operating costs, and finance them at a lower cost, we believe the Company's assets would have a higher value, closer to NAV than the current share price," Kazarian stated. Instead of waiting for a market that is consistently skeptical to acknowledge NAV, a managed wind-down would enable its direct realization. A "
A week before Edinburgh Worldwide's (LON:EWI) shareholders are scheduled to vote on Sabas's plans to replace its board with three independent directors of its own choosing, the letter surfaced. A general meeting is set for January 20 to vote on the proposal.
Saba is being resisted by Herald and Impax Environmental Markets.
The managers of other closed-ended funds in which Saba has a sizable stake are being prompted to take preventative measures due to the disruption Saba is causing at some of them.
Herald Investment Trust (LON:HRI) released a tender offer on January 9th that would allow shareholders to redeem their trust shares at or near NAV. Herald Investment Trust, like EWIT, was one of the seven trusts that rejected Sabas proposals last year.
Saba must tender all (or materially all) of its stake in HRI, which was 30.7% at the time of Heralds' proposal, in order to accept the offer.
According to Andrew Joy, chairman of Herald Investment Trust, "this proposal will enable long-term shareholders to remain invested with the current successful manager and mandate they have chosen, while also providing a full exit route to short-term shareholders." To put it another way, it provides a way out for shareholders who are skeptical of the current management without giving up control of the trust.
"Given that a process of attrition may eventually see Saba able to win a simple majority vote even though it itself is a minority shareholder, the board has assessed that it is not sustainable to do nothing," Joy stated. As a result, the board has thoroughly thought through a variety of options, including during extensive conversations with Saba. The "
On January 16, Impax Environmental Markets (LON:IEM), of which Saba owns 20.7 percent of the shares, made a comparable offer.
Although Saba hasn't yet demanded that IEM take any action, the board of IEM seems to think that the hedge fund's substantial shareholding is unstable and that Saba is preparing to shift the trusts strategy away from its present emphasis on environmental markets.
As of right now, IEM is the only investment trust with a UK listing that focuses on environmental solutions.
"The board cannot stand by while Sabas actions create an environment of uncertainty and risk for all our shareholders," stated IEM chairman Glen Suarez. "Once Sabas' destabilizing influence has been eliminated, the continuation tender offer put forth today is intended to give shareholders the option to stay invested in IEM and reap the long-term growth prospects of an environmental markets strategy, or to exit at close to NAV if they have a short-term investment horizon. A "
IEM shares were trading at an 8.85 percent discount to NAV as of January 15, the day before the tender offer was made public.
In the event that Saba blocks the continuation tender offerwhich it is able to do given the size of its shareholdingboth investment trust boards have outlined a backup tender offer proposal. In order to implement this, a lower voting threshold would be necessary, so Saba could not unilaterally block it.
According to the trusts boards, this will allow shareholders to redeem their shares at near NAV without being compelled to stay invested in a vehicle that Saba essentially controls.
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