Enter the activists

Trouble is brewing in the listed private equity sector as a Paris-based investment company tries to shake up the way a listed fund of funds is managed – and has vowed to do the same with other vehicles.

Paris-based closed-ended investment company Mantra Investissement has launched a scathing attack on the management and performance of Swiss-listed fund of funds Private Equity Holding. Alpha Associates, which manages PEH, has responded with a vehement rebuttal of Mantra’s claims, holding up the vehicle’s strong performance and forthcoming changes to its fee structure.

The Mantra/PEH spat is playing out against a backdrop of upheaval and consolidation in the listed private equity sector. In April, listed French buyout group Eurazeo agreed to acquire NYSE Euronext-listed investment group OFI Private Equity, while fund of funds group HarbourVest Partners submitted an offer for the entire share capital of Switzerland-listed Absolute Private Equity.

Only the large US-listed alternatives managers like the Blackstone Group and Apollo Global Management seem relatively immune to the storm brewing across the Atlantic as activists like Mantra seek to realise greater value for shareholders and reduce entrenched discounts to net asset value. Mantra, having published a letter to other PEH shareholders criticising the fund’s board of directors, also vowed to retain its stake in Absolute Private Equity, the Swiss fund of funds, subject to a tender offer for its entire share capital by HarbourVest.

Activists take aim  

In partnership with activist shareholder Guy Wyser-Pratte, Mantra is the second-largest shareholder in PEH with just over 5 percent of the company. Their chief concern was that PEH’s share price represented a wide discount to the company’s net asset value. As of March 22 this year, that discount stood at 40 percent.

Yet Bob Long, chief executive of Conversus Asset Management, which manages the Euronext-listed investment fund Conversus Capital, took issue generally with shareholders’ preoccupation with discounts.

 “The myopic focus on discounts is misplaced, as they represent only one element of the value proposition for stockholders. NAV performance matters. Through NAV growth of 700 bps annually better than the S&P for our four year life, our current stock price has matched that index, despite a discount that remains wide by historical levels,” Long says.

Turning back to PEH, Mantra initially proposed three steps to improve that discount: stop commitments to new investments; implement a cost-cutting plan; and review the investment strategy, including “orderly wind-down options”.

After a letter raising objections to the way PEH was being run in April, Mantra and Wyser-Pratte wrote again to the company and its shareholders in May, ramping up the pressure on PEH by proposing it replace the entire board at the company’s forthcoming annual general meeting.

The activists noted the share price had improved since publication of their April later, with the discount to NAV narrowing to its smallest level in three years. They also proposed an immediate end to new commitments and the imposition of a cost-cutting plan. The latter would involve halving board compensation, which they alleged was two to three times higher than that received by the boards at PEH’s peers. Mantra cited PEH’s Swiss peers, Shape Capital, Absolute Private Equity, and Castle Private Equity, which were trading at discounts of 26 percent, 32 percent and 42 percent respectively on March 22. Mantra said PEH’s shares had gained 18 percent since they announced their activist approach with Wyster-Pratte, helping the discount narrow to 29 percent.

Petr Rojicek, partner and chief investment officer of Alpha Associates, strongly contested Mantra’s allegations however, arguing some of their statements were false.

“We understand their frustration at the discount [to NAV], but are taking steps to reduce it. Unfortunately, during the financial crisis, block sellers forced to sell regardless of PEH’s performance drove its share price down. During the crisis, we didn’t have to sell any of the fund’s assets, and we managed its liquidity better than most. We also never took on any debt. Over the last 12 months, PEH has actually performed very well compared to other listed vehicles,” he said. 

Countering allegations that the board members were insufficiently aligned with the fund, he added: “Alpha is the largest shareholder in PEH, so we personally have a very large exposure to the stock. We are very closely aligned, perhaps more so than is the case with managers of other listed vehicles.”

Rojicek added that from next year, a portion of the fund’s management fee would be tied to its share price, and said its fees were comparable with its peers.

Mantra took issue with the new fee structure. In an email to this publication, it alleged that an unacceptably small portion of compensation was tied to the share price under the new plan. It also said that contrary to PEH’s board’s claims, other managers already tied compensation to share price, and cited Scandinavian Private Equity as an example. 

PEH also provided data showing its share price outperformed the LPX50, the MSCI World Index and its six listed peers from 1 January 2007 to 31 March 2011.

Peter Wolfers, part of Alpha’s investor services team, said that two years ago, PEH traded at a discount of over 80 percent, before narrowing a year later to 51 percent. At the end of the most recent financial year (31 March), the discount decreased to 36 percent, he said. He said work remained to narrow the discount further, but the vehicle would do so by investing in top funds, making regular distributions and undertaking marketing activities.

Listed managers beware

PEH is unlikely to be the only company to come under pressure from activists. Mantra’s most recent letter sounded a warning note to the whole listed private equity sector: “Listed private equity funds in Switzerland and globally trade at excessive discounts to net asset value, making it incumbent on all of the sector’s players to re-examine the appropriateness of listed structures for private equity funds. Members of the concert group already own stakes in four of five listed funds of private equity funds in Switzerland, as well in many non-Swiss listed private equity funds.”

David Hersh, one of the partners at Mantra, told Private Equity International: “We feel that if a board isn’t doing its utmost to realise value for shareholders, we’ll take action. We are invested in a number of listed funds, and we have a few ideas about further action to take.”