Castle mulls radical fund overhaul

Switzerland-listed fund Castle Private Equity has become the latest publically traded fund to bow to shareholder pressure, having announced a raft of changes ahead of a radical restructuring.

It’s been a tough year for listed private equity. Economic uncertainty has led to volatile stock markets. And volatile stock markets spell bad news for listed private equity firms. As a result, most have been trading at wide discounts to their underlying net asset values. Shareholders have grown restless as managers’ efforts to narrow these discounts have met with only sporadic success.

The latest casualty appears to be Castle Private Equity. The Switzerland-listed fund, a joint venture between LGT Capital Partners and Partners Group who both own significant stakes in CPE, announced on Thursday that it would explore options suggested by one of its key shareholders to radically re-shape the fund’s structure.

Some LPs favour a winding-down of the fund, but some are keen for it to continue investing

Hans Markvoort

The proposals made by Abrams Capital, which owns between 15 and 20 percent of Castle’s shares, call for the CPE vehicle to be converted to an open-ended mutual fund, a temporary suspension of new investments, an Abrams representative to be elected to the Castle Board and a renegotiation of the investment manager’s fees.

Hans Markvoort, a principal at LGT, told Private Equity International that the review would last well into 2012, adding that proposals would likely be put to shareholders at the Castle Annual General Meeting in May.

“Some LPs favour a winding-down of the fund, but some are keen for it to continue investing,” he said. “It makes sense to rebalance the fund to deliver greater liquidity, and find a better way to give investors greater access to the underlying performance of the portfolio. We probably haven’t done enough in the past in this respect, but we have undergone three years of a discount [to NAV] crisis for listed private equity.”

Partners Group already has some vehicles structured along similar lines to the proposed mutual fund. Other listed peers such as Conversus and ShaPE have already gone down the realisation route or what Castle referred to in its statement as a “harvesting strategy”, Markvoort said.

Other examples include UK-based LMS Capital, which in October announced it would cease investment activity and strive to realise the portfolio as a result of shareholder pressure. There has also been consolidation, with HarbourVest Partners acquiring listed fund Absolute Private Equity and French group Eurazeo annexing OFI Private Equity.

Castle’s management has already undertaken some measures while it mulls the future structure of the fund.  
“In order to maintain maximum flexibility ahead of the potential conversion into an open-ended structure, no further new investments will be initiated until the future structure of the Company has been resolved,” Castle said in a statement.

The Castle board has also begun negotiations regarding the investment manager’s fee arrangements, it said. In addition, the board said it would support in principle the appointment of a director nominated by Abrams Capital at the AGM.

The most radical proposal involves the reconfiguration of CPE as an open-ended mutual fund. In the statement, Castle said: “In such a vehicle each investor would be able to decide individually whether or not to realise their shares at net asset value, subject to the availability of liquidity. The structure envisaged would consist of a SICAV with quarterly liquidity and net outflows limited to a maximum of five percent net of net asset value per quarter.”

It warned however that: ”A 2009 effort by the Company to convert into a similar structure failed to clear Swiss regulatory hurdles. There remains a possibility that such a conversion will not be feasible in the current legal and regulatory framework. In this event the board will consider other options, including continuing as a closed-ended company with possibly additional listings and/or a permanent cessation of investment activity.”