Reasons to vote in favour of E&P's CD fund merger proposal?

Summary: In it's Explanatory Memorandum (Section 3.3, pg 10) about the CD fund merger E&P lists the following reasons a shareholder might vote in favour. I have provided initial comments on these below.

Update: On 14 Oct 2022 E&P rushed out a Merger Proposal Update: CD1/2/3 investors were furious at suddenly being trapped and the update promises to prioritise withdrawals before new investments. However, the many significant reasons for shareholders in CD1/2/3 to vote against the merger remain.

I will wait for details of the revised Proposal before further comments. However, the original comments below largely stand and are worth considering given E&P recommended it to shareholders as in their best interests! Even if you trusted E&P before, should you still trust them now?

The harder you look the less sense E&P's arguments make!

Details:

a) From 2023, the Proposal will provide Unitholders an ability to subscribe for (July 2023) or redeem Units (expected December 2023) at or around net asset value (NAV) 

"The Proposal will provide Unitholders with a new liquidity framework for holdings in the Merged Fund. The Responsible Entity proposes to make pro rata withdrawal offers every six months to the value of approximately 5% of the Fund’s Units on issue. Units would be redeemed at NAV, less the Sell Spread. The Responsible Entity will consider whether it is in members’ best interests to increase the withdrawal offer if withdrawal requests are consistently higher than 5% of the Fund’s Units on issue. The withdrawal offers may be funded by reinvested distributions, inflow from applications, sale of fund assets, possibly some borrowings or a combination of these."

<< This is a phantom redemption at NAV. It starts at the earliest in Dec 2023. It will be massively oversubscribed, so you may only get 5 to 10% out every 6 months from Dec 2023 and access to any % withdrawal is purely at E&P's discretion. If no-one wants to buy on-market at 30% plus discounts, the presumption of inflows at NAV is ridiculous. The existing structure is self-liquidating and investors can then decide whether, when and how to reinvest in private equity. The new structure has E&P as the gatekeeper on returning capital. Borrowing money to fund withdrawals, cash drag, and paying higher fees are downsides not upsides for investors.>>

"By contrast, the current Fund IV structure offers no near term liquidity options. Fund I, Fund II and Fund III are currently trading at 35.0%, 38.3% and 36.0%1 discount to NAV respectively and therefore, while they do provide liquidity as listed entities, this is currently at a material discount to book value. The Responsible Entity has previously conducted an on-market buy-back program for Fund I and Fund II in June 2021, but it has not sufficiently closed the discount to NAV for those funds. The Proposal will allow subscription and withdrawal to occur at prices that are closer to NAV. Funds I & II (and Fund III to a lesser extent) are already offering some effective liquidity at NAV in the sense that assets are being sold down and the capital returned to investors, however the timing of future capital returns is unknown and there may be a tail of investments which take longer to be sold."

<< The fact that CD4 offers no near term liquidity option is a failing of, and problem for E&P not CD1/2/3 investors. CD1/2/3 investors have liquidity at NAV via the current self-liquidation structure with a much quicker return of capital than via E&P's Dec 2023 phantom liquidity analysed above. See the below post for the many ways E&P could be delivering better liquidity with no change in structure (to create a permanent fee-enhanced vehicle): > What can be done to reduce the NAV discount and provide liquidity?  >>

"In addition, Unitholders will have an initial opportunity for liquidity during the approximate six month window where the Merged Fund will remain listed on the ASX (“Transition Period”). During the Transition Period, Unitholders will have the ability to sell their holdings on the ASX, however there is a likelihood that the Merged Fund may trade at a discount to NAV during this period. 

The Responsible Entity will also look to conduct on-market buybacks during the Transition Period. The buybacks will be, if the relevant Fund III resolution is passed, for up to 10% of the number of Units on issue following the merger. It is expected that the maximum number of Units which can be bought back is approximately 26.8 million Units."

<< E&P appear to be linking the liquidity offered by a buyback to their merger proposal, but a 10% every 12 months buyback is available continuously without a shareholder vote (let alone merger into a captive fund). E&P has failed to deliver continuous, fully-utilised buybacks for CD1/2/3 shareholders using the substantial cash available since they've been in wind-down phase. This and other failings are good reasons to get rid of E&P or force change, not give it even more power over investor's funds indefinitely. >>

"The first regular withdrawal offer is expected to be made in December 2023. The Proposal will also allow new and existing investors the ability to invest in the Fund at NAV through a monthly subscription process, expected to begin in July 2023, as outlined in Section 4 of the Fund’s PDS. Unitholders will have the ability to purchase Units on the ASX during the Transition Period as well." 

<< If E&P think, given their track record and responsibility shown to each CD fund's investors, they can attract new private equity investors they should launch a brand new fund and give it a shot. There's no reason to force CD1/2/3 investors into it if this really was a fund that had any chance of attracting new investors. >>