Sherborne Investors, the hedge fund led by Edward Bramson, has heavily criticised Electra Private Equity, the London-listed investment trust in which Sherborne has accumulated a 20 percent stake this year.
In a letter to fellow shareholders, Sherborne said Electra’s value could be increased by more than £1 billion, equating to a share price of £60, more than double than the current share price.
“Electra’s past practice of financial engineering and seeking preferential access to favourably priced investments has proved to be no longer adequate to produce competitive returns,” Sherborne said. “In fact, a recently published study indicates that more than half of all private equity returns are now the result of operating improvements in companies that funds acquire, [an area in which Electra] has fallen behind the times”.
Electra’s performance issues have persisted for many years and have recently accelerated, Sherborne argued. “This is why we are proposing a strategic review and certain changes to the company’s board of directors, to bring a fresh perspective that we believe will be in all shareholders’ best interests,” it added.
Sherborne criticised Electra for comparing its performance against the FTSE All-share, instead of the FTSE 250 index, adding that the FTSE All-Share derives most of its value from very large companies that are not comparable to Electra or its portfolio companies. “The ten-year return of the more comparable FTSE 250 index was almost double that of the FTSE All-Share, so comparisons with the latter, of course, present performance in a more flattering, but less relevant, light.”
Electra’s investment portfolio would have failed to beat an investment “in a relatively simple and inexpensive FTSE 250 tracking fund in each of the last seven years”, Sherborne added. Because Electra’s investments are generally not listed and because it owns controlling or influential shareholdings in most of its portfolio companies, this means it closely resembles unlisted private equity funds, according to Sherborne. “In the last five years, 67 percent of private equity funds of similar size dating from 2009 produced better returns than Electra.”
According to Bramson, “even a modest improvement in operating performance would have a major positive impact on shareholder value”, adding that this would have been a major focus of the strategic review Sherborne has previously proposed. In the same letter, Sherborne asked fellow shareholders to vote in favour of electing Bramson and Ian Brindle to the board during the general shareholder meeting, which is scheduled for 6 October.
As well as criticising Electra’s performance, Bramson condemned its fee structure. Over the last five years, investment expenses have absorbed more than 42 percent of the total return on Electra’s investments, reducing shareholders’ NAV by approximately £275 million over the period, he claimed. “These expenses create a very significant burden on returns to shareholders. The strategic review should establish a framework for appropriate levels of investment expenses for the future as a means to improve the returns earned on shareholders’ capital.”
“We note Sherborne’s letter issued this morning and will be giving a forceful response in due course,” an Electra spokesperson said in the response to Sherborne’s letter. Electra Private Equity, whose investment manager is Electra Partners, led by chief investment partner Alex Fortescue, recently urged its shareholders to vote against Bramson’s proposals for a strategic review and the removal of Geoffrey Cullinan as a director.
Analysts also seemed unconvinced by Sherborne’s arguments against Electra. “Shareholders should obviously await Electra’s response and weigh up the arguments ahead of the vote on 6th October, but at this stage we think that Sherborne needs to come up with a more convincing vision of Electra’s future strategy and structure if it is to win the vote on 6th October,” Oriel said.
“It remains our view that Sherborne has not proved its case against the incumbent board and that to appoint their directors, and implicitly mandate them to lead a strategic review, would be an unnecessary, and excessive, course of action… as such, we believe it remains more likely that the resolutions will be rejected,” Dexion said.
“Electra can be criticised with hindsight for the cost of sitting on relatively high cash balances as a result of gearing up long term post the GFC in anticipation of deals that were slower than expected to materialise,” JP Morgan added. “And while it is true that fees – at approximately 1.5 percent per annum and 18 percent of gains if an 8 percent per annual hurdle is met – are high in absolute terms, these are not out of line within the industry, [or] indeed Sherborne’s own fees, which has a potential maximum performance fee of 25 percent.”
At 14.30 BST, Electra shares were down 1p to 2,730p, a 0.04 percent decrease, giving the trust a market capitalisation of £966.7 million.