Why CD Fund investors should vote against KAM taking over as responsible entity
Summary: On 15 May 2023, E&P released ASX announcements for all three CD funds of a proposal to transition its responsible entity role to K2 Asset Management (KAM). E&P's many failures to act in investor's interests have been exposed on this blog and in the media. In their haste to dispatch E&P, CD Fund investors may consider almost any alternative as better. However, KAM hasn't explained how it would be better serving CD Fund investor interests (expediting distributions and realisation via merger or secondary sales). In this post, I detailed several reasons why CD Fund investors should default to voting NO to the Proposal for KAM to take over. Update 19 June: KAM was voted in as RE for all CD Funds. I've updated this post with the commitments it's made in relation to the vote.
|Don't let E&P burn investors one last time on the way out!|
Summary details on the KAM Proposal and what will happen if it isn't passed are in sections 2 and 3 further below.
Update 19 June 2023:
At the general meetings for CD1, CD2 and CD3 K2 Asset Management (KAM) was successfully voted in to replace E&P as responsible entity. Around 20% of total shareholders (perhaps mostly with financial advisors, and possibly many still advised by E&P) were motivated enough to vote FOR the change and outnumbered those voting against. Some institutional and significant investors voted AGAINST. The majority of shareholders didn't vote, and many may either not have known about the vote, or not known whether it was significant.
Vote Results (50% of voting shareholders required, so all three votes passed):
CD1: Total Shares: 36,551,180. For: 8,212,433 (22.5%). Against: 5,037,598 (13.8%). Proxy's Discretion: 810,165. Abstain: 20,000.
CD2: Total Shares: 52,479,086. For: 11,368,972 (21.7%). Against: 6,806,286 (13%). Proxy's Discretion: 2,165,016. Abstain: 65,210.
CD3: Total Shares: 72,028,420. For: 12,918,582 (17.9%). Against: 8,632,425 (12%). Proxy's Discretion: 2,033,373. Abstain: 0.
On 8 June 2023, in response to feedback from CD Fund shareholders (such as this post that was shared on Hotcopper), KAM made the following commitments in an ASX announcement:
K2 are committed to working closely with the manager to ensure an orderly and timely return of capital to investors. Capital will not be reinvested within the Funds, and the CD Funds will have a natural life span expected in the asset class.
➢ K2 do not intend to change the investment strategy or to slow the capital returns to its unitholders.
➢ K2 do not intend to change the structure of the Funds as standalone investment schemes.
➢ K2 will ensure the orderly and timely return of capital to unitholders. K2 will look to implement a consistent and communicated distribution program, excess cash will not be retained.
➢ Strategies to narrow the discount to NTA include special distributions in line with the realisation of investments and regular marketing and communications. Confidence around the realisation of investments and the consistent return of capital are key.
➢ Communication to investors will be refined with regular roadshows to complement additional webinars providing an open forum for ongoing communication with K2.
➢ K2 will provide a lower aggregate fee for the provision of RE services to the Funds, resulting in a lower cost to unitholders.
➢ The focus is on capital return to investors and implementing strategies to narrow the discount to NTA
We are committed to having open and transparent discussions with unitholders who wish to do so. Please contact us via the following email address: email@example.com
These commitments were reiterated at the general meetings and, in particular, the commitment to have open and transparent discussions with unitholders.
The vote is over, KAM will be responsible entity, and I recommend all unitholders seek a constructive and positive relationship with KAM. There is an opportunity for this to be win-win, with KAM's reputation enhanced if it follows through with its commitments.
1. Summary reasons to vote NO to the KAM Proposal (unless persuasive commitments emerge)
a. E&P's decisions and recommendations haven't prioritised investor interests. Why trust them now?
In every major decision (deep discount sale to Whitehorse, attempted evergreen capture in the CD Fund Merger) E&P has proved to act contrary to investor interests. Even after humiliating votes against its proposals, it continues to insist investors are clueless and actually voted against their best interests! E&P has shown contempt for investors time and time again. If you don't trust them, do not blindly follow their recommendations (voting YES), especially in the absence of any convincing reasons to do so.
b. E&P still refuses to consult investors before making decisions and recommending Proposals.
Once again, E&P did not consult with any investors about their interests or conditions for agreeing to switch responsible entities before making the decision to select KAM and set out a Proposal for investors to vote on. As a substantial investor, I am in touch with most other substantial investors and can advise that despite asking to be consulted in these decisions, once again we received no contact and have had no input into what type of responsible entity changeover would suit investor interests.
The consensus priority from sophisticated investors is still the same: realise maximum cash from the CD Funds as quickly as possible. The KAM Proposal does not do that, and KAM's financial interests are actually the opposite.
There is still no proper consultation with investors or genuine attempt to prioritise investor's interests (we own the funds, E&P and KAM do not!).
Update 19 June: KAM has shown signs it may have a more open, communicative and proactive relationship with investors.
c. KAM had not provided commitments regarding quickly realising cash from the CD Funds but as of 8th June has made some commitments
KAM had been directly contacted to provide acceptable commitments (if voted responsible entity) regarding cash realisation actions like those below but at the time had not done so:
- Actively seeking a merger of the CD Funds with another listed or unlisted fund (e.g. Pengana's PE1).
- To the extent possible, seeking the CD Fund General Partners to more actively pursue secondary transactions at reasonable values to quicken portfolio realisation.
- Pursuing more efficient distribution of available cash and making overall cash positions more transparent at least each quarter. For example, based on the 31 Mar 2023 annual report, CD2 has over 50 cents in cash but no distributions have been announced or foreshadowed.
Update 19 June: See the beginning of this post for the commitments KAM made on 8th June.
> Update 19 June 2023:
d. KAM is unprofitable and badly needs to grow Funds Under Management and fees. Those are its primary reasons for trying to take over as RE for the CD Funds.
KAM's announcement about it taking over as responsible entity on the CD Funds did not contain any significant benefits for CD Fund investors but instead implied to KAM investors that this was a fait accompli, and focused on it greatly boosting funds under management and revenues:
Unitholder votes are expected to take place on 19 and 27 June 2023, and upon the votes passing, E&PIL will be replaced by K2 as the RE.
The above would result in a substantial increase in funds under management and advice (FUMA) by circa AUD $1.68 billion. Should the vote be successful, this will have a significant impact on K2’s revenue for the 2024 financial year.
KAM's focus is what you would expect absent any constraints: it's own revenue and profitability. KAM's share price jumped massively on the news which might be an overreaction if you thought the CD Funds would be liquidated or realised as soon as possible.
While it is very unlikely to be as incompetent and irresponsible as E&P regarding administration, communication and tax for the CD Funds, it obviously has financial interests to retain as much of the FUM for as long as possible. The only way to curtail this is to obtain suitable commitments in advance of a vote.
e. KAM was supposedly chosen for having the cheapest bid. But the trivial savings are worthless compared to a responsible entity with the competence and ethics to actually serve investors
CD3 has the highest gross assets out of CD1, CD2 and CD3. As at 31 Mar 2023 they were: $162.45m.
- The responsible entity saving of 0.03% is just $48,700.
- The administration fee saving 0.025% is just $40,600.
E&P tout this as the key factor in choosing KAM. But all of the substantial investors I am in contact with would actually rather pay slightly higher RE fees if it meant getting a responsible entity that would serve investors by:
- realising maximum cash from the CD Funds as quickly as possible.
- properly managing the CD Fund tax situations and provide better transparency and reporting.
- consulting investors before making decisions or initiating proposals.
Shamefully, E&P refuses to disclose who the other responsible entity candidates are. Let investors choose!
f. E&P has form for burning investors one last time on the way out!
New Energy Solar was another recent fund E&P feasted on, butchered and then tried to shed itself of the stench. Investors should familiarise themselves with E&P's final decision making on that fund: maximising E&P's interests and ruthlessly trampling investor's interests.
“New Energy has failed in large part because of its entanglement in the Evans Dixon mess, and it seems unconscionable that Evans and Partners wouldn’t waive its final fee to reduce the loss to investors,” the Ethinvest boss told this masthead.
“The investment manager may have a legal right to a final payment, but it has no moral or ethical foundation in my view.” “Multiple failings within the Evans Dixon Group are responsible for the fact that the directors feel compelled to recommend that shareholders are best served by winding the company up and crystallising large losses.”
The lesson is that E&P has no shame about burning investors one last time. It finally admitted in the Explanatory Memorandum that E&P's reputation is a significant negative factor in the discounts for the CD Funds. But it still ignores CD Fund investors right to chart their future with whatever conditions we think are necessary.
...a responsible entity unrelated to the negative sentiment that has prevailed over the US Masters Residential Fund (ASX:URF) (for which E&PIL is the responsible entity), which may be a contributing factor to the discount to NTA at which the Fund trades.
Just as informed CD Fund investors prefer to wait for the distributions at NTA rather than selling at massive discounts, we also prefer to wait for acceptable offers from the various self-interested vultures that are circling. E&P had several offers to take over as responsible entity but has disclosed to investors none of the others. Whose interests is that secrecy serving?
The lure of the captive capital will reward the patient. In the meantime, each distribution is returning significant gains.
2. What is the Proposal for KAM to take over as responsible entity?
You can read of all the details in the 15 May 2023 announcements, as well as any follow-up announcements posted via any of the CD funds.
- KAM would replace E&P as responsible entity (RE) for the CD Funds.
- The KAM RE fee would be 0.05% of gross assets not 0.08%.
- The KAM Administration fee would be 0.225% not 0.25% of gross assets.
- There are no other changes to accounting or other services or fees.
- No changes to the Fund’s structure or investment strategy.
3. What will happen if the KAM Proposal isn't passed?
Quoting from the 15 May 2023 Explanatory Memorandum:
If the vote is unsuccessful, the Fund will continue to operate in its current form, and E&PIL will remain as responsible entity of the Fund and retain the required personnel to implement its role appropriately. E&P’s stated strategic objective is exiting non-core businesses, including E&PIL.
In the event there are changes to E&PIL impacting E&PIL’s ability to provide responsible entity services on a continuing basis, E&PIL would explore all initiatives to locate a suitable replacement responsible entity, including the possibility of making an application for a Court appointed temporary responsible entity.
Essentially, even if E&P gives up and walks away, the worse case scenario is a court appointed temporary responsible entity. Investors will still ultimately have the right to vote on any permanent RE and seek acceptable commitments in doing so.