What is CD2 actually invested in as of 30 Sept 2022?
Summary: I've been a holder of CD2 for a couple of years and have had to maintain my own spreadsheets trying to figure out what it currently owned because E&P's monthly reports and CD funds website are so inaccurate and limited. In this post, I'm going to provide some insight into what CD2 actually owns as an example of how a truly responsible entity could be adding value for shareholders and making best efforts to reduce the NAV discount.
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| E&P's struggles with transparency and accurate info are key to the discount |
Details:
1. The totality of info on fund portfolios in the monthly reports is contained in the pie charts. But the pie charts are completely inaccurate and misleading!
Here's the Feb 2021 Monthly Update, the first one in which the pie charts were introduced:
And here's the Sept 2022 Monthly Update:
Notice anything? In a year and a half, E&P could only be bothered to update the colours, but the data hasn't changed at all!
But wait, it gets worse. The data actually hasn't changed since CD2 finished allocating initial capital. The data is identical to that in the March 2015 Quarterly Update! (Over 7yrs out of date!)
2. So how wrong is the pie chart data as of Sept 2022?
I could tell you exactly in ~30min if I had the relevant role at E&P (indeed I'd simply be publishing accurate, meaningful info in the monthly reports) but below is my best estimate using data revealed only because the Merger Proposal documentation finally provided a little transparency.
On page 124 of the Explanatory Memorandum, Kroll's independent expert report publishes this info:
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| Explanatory Memorandum. pg124 |
As you can see, the pie chart Portfolio Asset Allocation (sector) percentages are still identical to those published in March 2015! But the actual current sector percentages would be substantially different after over seven years where at least 71 of the 122 companies have been exited, further capital has been reinvested, and holding values have changed substantially.
Indeed, this becomes apparent comparing the Underlying Fund Manager pie chart with what is in the Sept 2022 Monthly Report. Kroll had to update the allocations to Underlying Fund Managers (for disclosure reasons) and this is where we start to get a more accurate glimpse of where CD2 is actually invested as of at least June 2022.
Due to disclosure requirements, for the first time ever, CD2 fund investors got to see a relatively up-to-date snapshot of where funds are currently invested (inclusive of changes in holding values):
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| Explanatory Memorandum. pg127 |
3. What can investors easily be told about where CD2 funds are currently allocated?
Well it only took me 20min to provide up-to-date summary Underlying Manager data (something E&P has never done for investors!):
1. $30.5m. Chicago Pacific Founders Fund. Portfolio/Company page
2. $12.7m. US Select Direct I. Portfolio/Company page
3. $9.6m. Main Post Growth Capital. Portfolio/Company page
4. $7m. Staple Street Capital. Portfolio/Company page
5. $6.2m. High Road Capital Partners. Portfolio/Company page
6. $4.4m. New Mainstream Capital. Portfolio/Company page
7. $3.9m. Tengram Capital Partners. Portfolio/Company page
8. $2.9m. Blue Point Capital Partners. Portfolio/Company page
9. $2.3m. Tower Arch Partners. Portfolio/Company page
Important Note: The Portfolio/Company pages on the Private Equity Fund websites usually cover multiple Limited Partnership funds. Each CD fund is linked with just one of these LP funds so you need to cross-check with the limited and often out-of-date info on the CD funds website and isolate the LP fund and timeframe.
However, at least investors now have a useful starting point for understanding with who they are currently invested and, in combination with the info on the CD funds website, can do their own research into current CD2 fund holdings.
4. Why does E&P deliberately choose not to be transparent about where CD funds are currently invested and at what valuations?
On page 8 of the CD Private Equity Fund Series Update - August 2022, the following table was published. It could easily have ordered the Funds by current holding allocation value (as I have above) and shown the fund name. Instead it anonymises the funds and the majority of investors would have no idea in which of these funds they are currently mostly allocated, and how much of this allocation is represented by a mark-up in holding values.
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| CD Private Equity Fund Series Update - August 2022. pg8 |
Instead of adding any real value for investors by providing up-to-date, transparent, meaningful data on the funds, companies and holding value mark-ups, E&P appears to prefer to limit the transparency in order to create a black box effect, whereby investors have to trust E&P is "managing the details/complexity/risk" for them, and that is why they are essential. Perhaps, E&P thinks this black box effect aids them when asking investors to trust them that the secret Merger Proposal it was working on for months and just revealed is really about shareholders' best interests?
This seems delusional. Instead, investors are finally beginning to wake up and get organised. The massive NAV discounts are because of E&P's failings. Much of those failings are about not providing up-to-date, accurate information as to investor's exposure. When markets are risk-off, and E&P has achieved nothing in bringing in buyside liquidity, some investors sell at massive discounts because they don't have comfort about what exactly they own. And that is wholly E&P's responsibility.
