How to decipher an E&P announcement regarding its merger proposal

Summary: Just a week after releasing the secret merger proposal (over 400 pages in total) it has spent months working on, E&P rushed out a 1 page Merger Proposal Update. It is desperately trying to stop a flood of votes AGAINST being cast by furious CD1/2/3 investors by allaying their concerns.

However, the merger is hopelessly flawed via its inclusion of CD4 and the ending of CD1/2/3 investors sight of the exit line in the specific self-liquidating funds they chose to be in. In this post, I will translate E&P's Merger Proposal Update into more accurate, candid language.

E&P yet to climb the first step in candid communication!

Details:

1. Queries from investors?

"E&P... has received a number of queries from investors in relation to the intended operation of the liquidity mechanism."

<< Replace queries with complaints and outrage from CD1/2/3 investors who suddenly realised it would take at least several years to exit under E&P's proposal, whereas CD1 and CD2 are likely within a couple of years of being over 90% exited at NTA and CD3 is likely to be over 75% exited at NTA within 3 years.

Under E&P's proposal, while waiting years longer, CD1/2/3 investors would obtain a performance outcome mostly driven by portfolios they didn't choose to be invested in. E.g. CD1/2 investors would move from mature investments close to realisation to a high proportion of early stage investments due to CD4's $280m asset size. >>


2. Unitholders can redeem some or all of holdings at NAV?

"The Responsible Entity will, following the delisting of the Merged Fund, target six-monthly withdrawal offers, where unitholders in the Merged Fund can apply to have some or all of their holdings redeemed at NAV."

<< This is grossly misleading. A unitholder in CD1/2/3 may well apply to redeem all of their holdings at NAV but so will everyone else who understands the situation, including CD4 holders. The withdrawal periods will be massively oversubscribed and scaled back pro rata. The original proposal was to target just 5% of units approximately every 6 months starting only in Dec 2023 at the earliest. All of this is subject to many conditions and E&P's discretion. >>


3. Prioritising Liquidity?

"All cash available from realisations of underlying assets which are in excess of the Merged Fund’s operating and working capital needs (Excess Capital) will be made available to meet withdrawal requests, irrespective of the quantity of withdrawal requests in response to a withdrawal offer (ie, whether withdrawal requests are above, equal to or below 5%). "

<< Oh, how gratifying that E&P finally understood that virtually all CD fund investors are interested in exiting E&P-run funds, either via some liquidity nearer NTA or waiting for distributions at NTA. This concession has been dressed up to sound as promising as possible but how much do you trust E&P? 

In their new evergreen fund E&P may decide they have extensive operating and working capital needs they need to set aside funds for. E&P may decide they need to keep a sizeable, minimum cash level, not use almost all cash in a withdrawal period and wait for it to be re-filled via future realisations. Given the non-existence of cash for new investments, perhaps E&P will even change how CD4 cash realisations are dealt with? 

And E&P may write the terms governing withdrawal offer periods to give it significant discretion to allocate capital while many existing investors are still trying to get out. And remember there is $280m of CD4 capital that has not feasibly been able to exit since the launch of that fund, which will dilute all exits of CD1/2/3 shareholders. Again, how much do you trust E&P to let you exit as quickly as possible when it just launched a merger proposal to switch to a permanent fund? (Are there even 1% of CD investors who asked for this evergreen fund? I doubt it!) >>

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