This is a follow up post from a couple of weeks ago from my question whether IS LIC VG1 ASX ABOUT TO WIND UP OR CONVERT TO OPEN ENDED? – Value Investing for a living?
What has happened since this above post?
VG1 ASX DIVIDEND HISTORY
On October 24th, VG1 ASX announced an update to target dividend policy – vg1 now targeting at least 5 cents per share, semi annually.
At the time this would equate to a 6.5% annualized dividend yield, or 9.3% IF dividends are fully franked and the yield is grossed up for this.
My emphasis above is on the IF in capitals, in terms of whether dividends may be fully franked. Arguably this deserves further discussion than was made in the above ASX announcement.
REGAL PARTNERS TAKEOVER OF PM CAPTIAL
Another development since my blog post a couple of weeks ago is that VGI Global Partners’ parent company Regal Partners Limited (ASX:RPL) have announced an acquisition of PM Capital.
For further details of Regal’s acquisition of PM Capital, here is a direct quote from the ASX announcement on November 3rd.
“Regal Partners Limited (ASX:RPL) (“RPL”, “Regal Partners” or the “Company”) is pleased to announce it has entered into an agreement to acquire 100% of the issued share capital of PM Capital Limited (“PM Capital”), a multi-award-winning investment management company with a core focus on global long / short equities and fixed income strategies. Established in 1998 by current Chairman and Chief Investment Officer (“CIO”) Paul Moore, the business services a diverse range of Australian retail investors and financial advisory groups, managing in excess of $2.7bn of funds under management (“FUM”) as at 30 September 2023. The upfront consideration for the acquisition is $20 million in cash, subject to net debt and working capital adjustments, with deferred, and largely conditional, consideration consisting of the issuance of approximately $130 million of converting redeemable preference shares in RPL (“Converting Shares”), subject to RPL shareholder approval.”
Noting the indirect link here, VG1 provided its own separate ASX announcement on the same morning noting that it had referred to an announcement by Regal Partners (ASX:RPL) in relation to the acquisition of PM Capital.
Specifically from the above link, that “it does not have an impact on the provision of its investment management services to VG1”.
I do not doubt that the above statement is correct at the current time.
WHAT COULD HAPPEN IN THE FUTURE TO VG1 ASX AND PGF ASX?
Aside from VG1 ASX contemplating whether a wind up or conversion to open ended structure would benefit shareholders, there could be other options perhaps to explore.
Consider the following:
- PM Global Opportunities Fund Limited (ASX:PGF) trades at a healthy premium to NTA, whilst VG1 ASX trades at a big discount. History has seen WAM ASX use its premium to NTA to acquire LICs trading at large discounts.
- Similarities exist in that PGF and VG1 are both global long / short equity managers, just that one has gone a little bit worse than the other in recent years.
- PGF has circa $62 million of deferred tax liabilities on its balance sheet, VG1 ASX has sizeable tax losses available to use in future periods according to its latest NTA statement. I am no accountant so I have no comment how this could pan out in a potential PGF takeover of VG1.
- Regal wants a funds management brand to better position itself with smaller retail shareholders. PGF ASX has done that very successfully whereas VG1 ASX has been unsuccessful.
- Before Regal’s acquisition of PM Capital, Regal may have been reluctant to go along with a PGF takeover of VG1 (all management fees they used to get from VG1 would then flow to PM Capital). I also note Regal own some 6% of VG1. After acquiring PM Capital now, they may not mind that so much.
- Should PGF not takeover VG1, then Regal’s management fee income via VG1 may not last too long. VG1 could be destined for open end conversion (seeing a lot of shareholders redeem), a wind up, and / or further shrinkage in AUMs from the aggressive on market buyback.
- Also currently, VG1 is well short of its high watermark performance fee hurdle. This also currently restricts the short-term potential for it to produce AUM fee revenue to Regal.
- Paul Moore has long had an appetite to increase the size of PGF. One can look back at various new share issues. The shares outstanding in PGF have more than doubled in the last decade. Some may also remember an innovative attempt at growing PGF back in 2018.
- Boards of LICs are constantly telling their shareholders these days you need to be large to maintain it trading at NTA or better. Whether this is correct or not, they have their own reasons to try and sell this. They state for example, increased size equals more research coverage, increased liquidity, lower fixed costs ratio. Perhaps PGF can wheel out the same trusty lines to sell it to their shareholders? Assuming a healthy premium to NTA continues with PGF, perhaps they can also come up with an attractive conversion ratio for both parties?
I am not necessarily suggesting the above takeover / merger idea is a more compelling solution to the VG1 shareholders suffering from the weak performance and large discount to NTA. It may be though yet another alternative they have aside from say a wind up, huge off market buyback at near NTA, or conversion to open ended structure, that could be considered. Perhaps even a combination of some of these alternative potential solutions could be given to VG1 ASX shareholders as a choice?
It seems like I am clearly missing something though as in terms of solutions to the VG1 discount to NTA, I have seen no mention from the company about these various options that may exist. It seems like the only plans on the table are on market buybacks, increased dividends (unsure how much will be franked in future), and increased marketing. All these attempts have been solidly in place for many years without much of an effect.
At the same time the elephant in the room of options whether to convert it to open ended, reduce management fees, wind it up or other look for other corporate proposals are left in total silence.
Whilst it might seem common sense what to do here in the interest of many shareholders, common sense is not so common these days. Clearly I am missing something.
LOGICAL SOLUTIONS FOR LARGE LIQUID GLOBAL ASX LICs at BIG DISCOUNTS TO NTA?
Others in the industry though seem to be pointing to these other sorts of solutions, refer below a good article from Graham Hand via Firstlinks:
Why LICs are closing and more should follow (firstlinks.com.au)
The above article made some points that almost match VG1’s strategy to close the discount describing it as quote:
“Kicking the can down the road”
Managers have developed techniques to compensate for inadequate liquidity in their LICs, including:
- Buying back shares at a discount
- Increasing marketing efforts to improve buyer demand
- Committing to regular payment of dividends
Here is another good article from Daryl Wilson (Affluence Funds Management), via the Livewire markets site:
The above specifically mentions VG1 amongst other ASX LICs.
The upcoming AGM takes place at a time soon when there are plenty of interesting questions to be put and voting to take place.