What are the true aims of the CD fund Merger Proposal?
Summary: On 26 Oct, E&P released details of its Updated Merger Proposal via a Supplementary Explanatory Memorandum and PDS. I previously summarised concerning questions regarding what the Updated Merger Proposal nominally offers compared to the reality when you parse the tricky language and obfuscation.
In this post, I provide further details on the stated aims of the Merger Proposal with my commentary. And then I clarify the true aims, which unsurprisingly are in E&P's interests, not investors in CD1, CD2 or CD3.
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| E&P has already let slip the true aims and can't delete them! |
Details:
1. A simple decision tree for voting on the CD Fund Merger Proposal
Essentially, E&P's claims and intentions - of pursuing CD1/2/3 shareholder interests, better prospects of exiting at NAV, improved liquidity, lower costs - don't match the reality. You can easily confirm this by going through the details (using the blog posts as your starting point) or you can simply decide whether you trust E&P or not.
A simple trust-focused decision tree is provided below:
2. What were the stated aims of the Original Merger Proposal on 5th Oct and then 7th Oct?
When first announced on Oct 5th the only stated aim was: "to form a single larger and more diversified fund."
On Oct 7th the Explanatory Memorandum was published and listed the following aims. I've added my comments underneath.
a. "to create a single larger, more diversified fund that will not have the limited life of the existing Funds"
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CD1, CD2, CD3 and CD4 are all quite different in allocations to U.S. private equity managers, sectors and individual companies. They are especially different in the maturity of the company investments with CD1 very mature and CD4 early stage. Investors were already capable of choosing exactly what, if any, proportion of each to own. This mash-up offers no benefits to investors in and of itself.
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b. "Historically, Listed Investment Trusts (“LITs”) have been an effective structure for retail investors due to the transparency and ease of execution of trading Units on the ASX, and from inception to the end of 2017, each of the listed funds in the CD Private Equity Fund Series traded at or around NAV. However, since 2018, the listed funds in the CD Private Equity Fund Series have traded at material discounts to NAV. The Responsible Entity believes these discounts are likely to persist."
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The massive discounts are not due to the performance of the U.S. fund managers (which has been commendable) but only to E&P's many failures: the legacy of how it's handled URF and New Energy Solar, its failure to attract new investors, a lack of accurate data on what the funds are invested in, not running continuous buybacks, and its appalling failures to advise the least savvy investors to wait for distributions to exit, not sell at huge discounts.
See: > What can be done to reduce the NAV discount and provide liquidity?
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c. "Further, the structure of the CD Private Equity Fund Series does not allow investors to maintain or reinvest in the strategy. Instead, investors’ exposure is gradually liquidated over time, irrespective of any investor preferences to remain invested."
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The limited life of the CD funds was always known to everyone before entry, and the vast majority of investors see self-liquidation of the funds as a feature not a bug! They can then choose to re-invest in exactly which funds they want, when, and in what amounts according to their specific interests.
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3. What were the revised aims in the Updated Merger Proposal?
I discussed the Updated Merger Proposal announcement here:
> Concerning questions about the Merger Proposal Update details
"A key purpose of the Proposal is to improve the ability of investors to withdraw from their investment, should they wish to do so, at a fair price. Taking into account investors’ feedback, the RE has decided to adjust its strategy for the Fund, to potentially increase the size of the regular six-monthly withdrawal offers from the Merged Fund that was described in the EM."
And compare it with this statement in its Original Merger Proposal:
"The Merged Fund will be an open-ended fund without a fixed term. It will operate differently to the existing Funds in that proceeds of the sales from the underlying companies in the US will mostly be reinvested rather than being returned to investors."
Unfortunately for E&P they can't go back and delete this original statement! These two statements are completely at odds with one another and explain all of the tricky definitions, complexity, conditions, E&P discretion, and obfuscation of the most relevant facts like what will happen to already realised cash.
Again, I'd ask, do you really trust E&P given this track record? If not, you should obviously vote NO.
4. So what are the true aims of the Merger Proposal?
a. There are already significant cash levels in CD1/2/3 that have to be released via distributions or buybacks, and this will only continue till all $320m is released to investors as the funds are fully-liquidated. E&P wants to lock as much of this in as possible as it stands to gain millions of dollars in fees. CD4's $280m will also ultimately self-liquidate in its current structure.
b. Many CD4 investors are not sophisticated and were advised to buy in-house, fee-generating products (just as with URF, New Energy Solar and CD1/2/3) even if they did not best suit their needs. In the unique case of the unlisted CD4, the ability to feasibly exit being a key unmet need, as since launch this has only been possible if you could find someone else to buy it from you off-market. The Merger Proposal will provide an exit for the first time for most CD4 investors by relying on cash realised from CD1/2/3. Obviously, this significantly dilutes the exit of CD1/2/3 investors as CD4 is much bigger.
c. E&P have used the opportunity of a new fund to reintroduce a significant fee that had expired for CD1 and will expire in Feb 2023 for CD2 and in 2026 for CD3. It is also introducing significant performance fees that have never applied for CD1 and CD2.
These are the major aims of the Merger Proposal and the Update changes none of them. This explains why E&P has been working on this Proposal for months (with 10 documents and hundreds of pages, costing millions in shareholder funds) but kept it secret from the actual investors! The aims were certainly not driven by investors in CD1, CD2 or CD3.
For more details on the true motivations and real outcomes for CD1/2/3 investors see:
> Reasons why CD1, CD2, CD3 holders should vote NO
