A rolodex of the firms with an interest in the CD Funds
Summary: With all of the recent machinations, I've decided to maintain a single blog post listing all of the firms with an interest in the CD Funds. There are various intentions: from passively riding the discount opportunity to active interest in clipping some part of the ticket. My main motivation in informing CD Fund shareholders is that they actively organise and advocate for their own interests: such as blocking adverse restructures (e.g. E&P's attempt to convert to an evergreen mashup fund); seeking mergers/exits at fair but not desperate prices (e.g. Pengana's PE1 proposals); extracting timely concessions (e.g. from K2 Asset Management in taking over as responsible entity); or encouraging institutional owners (e.g. WAM) to build stakes and speed up divestment and distributions.
New Site: I now run a site dedicated to eliminating almost all ASX Closed End Funds. I maintain a post on the CD Funds on that site. See: > Captive Capital
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| Patience and vigilance remain the best strategies for CD Fund retail investors |
Details:
1. Evans & Partners
https://www.eap.com.au/services/funds/
a. E&P Investments Limited (E&PIL)
- Until the June 2023 switch to KAM, has been the responsible entity of the CD Funds for a few years, with a few rebrandings since the merge of Evans & Partners; Dixon Advisory; and Walsh & Company (the original RE).
b. Other entities in E&P Financial Group (EP1)
- E&P Financial Group still contains other entities (DGP Inc) that remain involved including varying stakes in the General Partners of CD Funds.
2. K2 Asset Managemnt
https://www.k2am.com.au/
> Voting advice on KAM taking over as responsible entity
- As of July 2023, K2 Asset Management (KAM) is taking over as responsible entity of the CD Funds.
- Prior to the vote, KAM made significant commitments to prioritize the explicit interests of CD Fund investors to divest/exit and distribute cash; in the interim to narrow the discount; and to be transparent and consult investors before taking decisions.
3. Mercury Capital
https://www.mercurycapital.com.au
https://www.mercurycapital.com.au/portfolio/
> AFR - PE hotshot Mercury Capital targets $1b for Fund 4
- Mercury Capital is a successful Australian PE firm with the ability to direct significant capital (see AFR articles).
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> The Australian - Twiggy talks the good game, but technical details are thin on the ground
Much jostling of late for E&P Financial’s four private equity funds, with Pengana’s Russel Pillemer basically falling over himself to acquire them. Multiple offers and still no dice. Margin Call’s only question is where on earth is Clark Perkins, of buyout firm Mercury Capital?
All of which makes E&P’s listed Cordish Dixon private equity funds an obvious target for Pillemer, a shark in the shallows, who clearly brings the might to this battle of managers.
After all, the funds are in relatively good nick with decent underlying performance; they just trade at a chronic discount because of the reputational damage inflicted on E&P’s brand.
Hence Perkins, a real-world private equiteer (unlike Pillemer or the mob at E&P). He’s elbow deep in E&P and barely lifting a finger for control of his own turf.
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4. WAM Capital
https://wilsonassetmanagement.com.au/lic/strategic-value/
> What are Wilson Asset Management's intentions for the CD Funds?
5. Affluence Funds Management
https://affluencefunds.com.au
https://www.youtube.com/@affluencefundsmanagement5040/videos
- Affluence runs a $22m specialist LIC fund that holds the CD Funds. As of May 2023, the holdings appear to be stable and aiming to capture value mainly from the gains made when distributions are made at NTA (given discounts typically range from 25-35%).
- Commentary on Affluence's interest in the CD Funds can occasionally be found on its webinars (see YouTube channel above) and also in Livewire articles like its annual Melbourne Cup of LICs:
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We have owned the CD Funds successfully over recent years, as the extreme discounts combined with the good underlying performance provided some of the best periodic opportunities we have seen...
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6. Benjamin Hornigold Ltd (BHD)
https://bhdlimited.com.au/
- BHD is a $6m LIC that is now run by Michael Glennon (GC1) and Sulieman Ravell. It's primary strategies are discount capture, arbitrage, deep value. It has gradually been increasing its holdings in CD1, CD2 and CD3 and they are now over 15% of its portfolio.
7. Pengana Private Equity Trust (PE1)
https://pengana.com/our-funds/pengana-private-equities-trust/
https://www.youtube.com/@penganacapitalgroup6249
> E&P vultures hide the CD Funds carcass but will it work?
> AFR - Characters line up for Pengana, E&P private equity funds battle
> Livewire - Meet the private equity firm pulling back the curtain
- PE1 is a Pengana private equity fund. It approached E&P in Dec 2022 and Feb 2023 with proposals to scrip-merge the CD Funds with PE1 with a sizeable haircut on NAV for CD owners especially if exiting less than 18 months after the merge. E&P rejected the proposals, refused due diligence access to Pengana to review details of the CD funds, and did not pursue negotiations to complete a deal. Now that KAM is taking over as responsible entity, a fresh approach from Pengana may come to fruition if investors are strong enough advocates for it.
- See my blog post above for full commentary. In summary: "Pengana Capital has outsourced PE1 private equity management to GCM Grosvenor a very experienced U.S. middle market PE manager. The CD Funds operate in the same space so this is a serious proposal and worthy due diligence eye on valuations. With PE1 trading at any premium to NTA (which it generally does), it is NTA-accretive to PE1 shareholders to scrip-merge the CD Funds, especially given the CD Funds would be assimilated at some discount to their NTA."
- My closing comments were: "Finally, I should note that as long as E&P is facilitating a transaction (rather than blocking one), time is on the side of CD Fund investors. Future realisations will certainly be much closer to current holding values than the current deep share price discounts, and these will be paid out as distributions, reducing the potential gain for the acquirer or making it have to bid higher. The steady drawdown of the CD Funds captive capital is all the impetus needed to get a deal done." I remain of the view that investors are best off patiently waiting for gains of ~40-50% on each distribution (given discounts of ~30-35%) and an ultimate merger or secondary sale.
- GCM Grosvenor CIO Fred Pollock and his team provide excellent insights into the U.S. middle market, that are relevant to CD Fund investors. See the webinars on Pengana's YouTube site.
8. Which other firms are active in ASX LICs/LIT discount opportunities?
- Harvest Lane Asset Management (Luke Cummings) has over 5% in MEC and is trying to get it converted to an unlisted fund that can be exited at NAV.
- Miles Staude's Global Value Fund (GVF) is always active in ASX LICs and LITs and has plenty of current private equity discount plays (including WMA and several global ones) but no stake in a CD Fund.
- 1607 Capital Partners manages billions in funds that target Closed-end fund discount opportunities. It has previously taken large stakes in EAI, QVE, VG1 and FGX.
> 1607 Portfolio (13F)
- City of London Investment Trust occasionally invests in ASX LICs/LITs.
