Claire McSwiggan and Chris Le Page
It has been an interesting year inside the boardroom of investment companies, with a shift in focus from IPO deals and capital raising to managing the status quo. According to Claire McSwiggan and Chris Le Page of Carey Group in Guernsey, unexpected and under-discussed implications of the Brexit vote and market volatility has given rise to some interesting and sometimes unexpected, approaches from boards.
We have seen a notable trend post 2008 where the industry has shifted focus from open-ended funds with strategies such as traditional long only, hedge funds and fund of hedge funds, to closed-ended funds and the use of unregulated ‘fund like’ structures. Investment strategies have also gradually moved to a less liquid format with an upsurge in private equity, property, infrastructure, debt and other very specific investment strategies. While some of the open ended structures have weathered the storm, many of these have restructured to build in longer notice periods and in some cases to convert to more macro style strategies.
Guernsey itself has a significant presence on the London Stock Exchange, being by a notable margin the largest non-UK domicile for companies which maintain an LSE listing. Sadly, with market volatility and uncertainty we have seen very little IPO activity in the year to date, though in July a Guernsey company was the first successful IPO on the London Stock Exchange for 2016, raising £80m.
For existing investment companies, we have seen very different approaches to the challenging market conditions. Infrastructure and technological asset-based investment companies have had some success in raising new capital, be it a C-share issue, tap issue or placing programme. For other investment companies, priority in the boardroom has been managing discounts, managing costs and understanding the challenging market conditions. Seemingly gone for the present time are the days of the large C-share issues seen in 2014.
For some boards, strategy has simply moved down the agenda and ideas of new launches and fundraising has moved from the forefront to the last point of discussion in board meetings as boards have had to focus on a number of new challenges, such as refinancing, FATCA/CRS, Brexit and discount management.
Prior to the Brexit vote, significant focus had been on refinancing as many companies looked to close negotiations prior to the actual vote; however, few of boards had actually discussed the EU referendum and its impact in any great detail prior to the Brexit vote, the result of which came as a surprise to many. The resultant turbulence and uncertainty has proven difficult for even the most seasoned boards to predict and grapple with. Current market conditions are challenging and restrictive for strategy setting with a significant number of boards focusing on managing their existing portfolio in the short term, putting aside ideas of short-term growth.
We have seen investment companies for whom Brexit raises significant concerns and risks, where others see it as a significant opportunity. For one particular investment company, sentiment in the UK market has still had an impact on share price despite the company having no exposure to UK assets.
As a result of the above, we are seeing boardroom discussion turn to the management of discount to net asset value (NAV). Buyback has been the hot topic so far this year, along with the subsequent management of treasury shares. As a result of these discussions, a number of buyback programmes have been put in place with varied levels of aggressiveness and success. A number of companies are buying back for cancellation while others are buying back shares to be held in treasury, giving flexibility to reissue into the market when shares return to a premium. In 2016, the Companies (Guernsey) Law 2008, as amended, was updated to abolish the 10 percent treasury limit giving companies the freedom to buy back almost all of their issued share capital. However, in reality we have not seen many investment companies take advantage of the amendment; instead, they have chosen to adhere to the 10 percent limit.
The decision to embark on a buyback scheme takes some consideration as it is vital to truly understand the reasons behind a company trading at a discount to NAV. With the move to longer term strategies, more illiquid assets and less frequent valuations, these vehicles naturally become harder to put a true current value on and investors will often take a general market view. Discounts can also arise due to there being too much availability of shares, there being inadequate trading activity in order to obtain a true view, or indeed because shareholders do not have confidence in the actual asset valuation.
Discount management is especially important for companies which are subject to compulsory tender offers or continuation votes, where persistent discounts can lead to companies having to return significant percentages of their NAV to shareholders, which raises its own set of issues in an illiquid market.
In any event, embarking on a programme of buybacks requires careful management of cash flows as not to impede the investment opportunities of the investment manager, and has proven difficult when liquidity has been somewhat lacking in the market. While the buyback is arguably a return to shareholders, requiring a solvency based examination of the financial records, the support of the share price in the long term has been the key focus for boards in ensuring the long term success of the company, while acting in the best interests of the shareholders.
Those companies exercising the shareholder authority to buy back shares have seen varied levels of success, from significant closing of discounts to little or no change in share price, which again links back to needing to understand the true reasons for a discount.
With a tough year in Europe we have seen a definite swing in where new business opportunities are arising from, markets such as Canada, the US and from growing economies such as India, China and Africa.
This is not to say that Europe is finished; many established investment companies continue to generate strong returns for shareholders, both in the UK and in other areas of Europe, and have taken advantage of the current low interest rate environment helping to keep costs low. Unfortunately, as Brexit rumbles on toward its completion and little clarity around whether the UK will achieve a ‘hard’ or ‘soft’ exit, we expect this position to persist until such time as a level of certainty is achieved.
An original version of this article was first published by Financier Worldwide, November 2016.