Sherborne missile

Earlier this year, it emerged that Edward Bramson’s hedge fund Sherborne Investors had accumulated a 20 percent stake in Electra Private Equity, a London-listed investment trust. And for months, nobody was quite sure why.

Bramson had a reputation for shareholder activism, with a focus on operationally troubled companies. But Electra didn’t seem to fall into that category. In fact, in terms of total return, it has outperformed an index of its listed peers, the FTSE All-share and the S&P 500 Composite over pretty much any timeframe you care to mention. It claims to have delivered an annualised return of 14 percent in the ten years to 31 March 2014. So unlike 3i, Bramson’s previous target, it’s not exactly an obvious turnaround candidate. And Bramson himself seemed in no hurry to explain himself.

However, this phoney war finally exploded into life in August, when it emerged that Bramson had asked to be installed on the board (along with a colleague) and allowed to run a strategic review. Again, the initial reaction from the company and analysts alike was largely one of bemusement. What exactly did Bramson hope to achieve?

The Sherborne boss finally provided answers to some of these questions in mid-September, when he published some fairly incendiary criticisms of Electra’s performance and strategy.

In a letter to fellow shareholders, Sherborne claimed that Electra relied too heavily on financial engineering, and had “fallen behind the times” in terms of its ability to add value to portfolio companies. Sorting this out – courtesy of Sherborne’s operational expertise – could boost the trust’s value by more than £1 billion, he said (that would mean more than doubling the share price, which was just under £27 at press time). He also slammed Electra’s fee structure, claiming that investment expenses have absorbed more than 42 percent of the trust’s total return over the last five years, reducing shareholders’ NAV by approximately £275 million.

Electra promised “a forceful response” – and the following week, it delivered just that. In a thorough point-by-point rebuttal, it dismissed Bramson’s claims as “unverifiable and unsubstantiated”, suggesting that he showed “a lack of understanding” of Electra’s business.

For one thing, the trust said, Sherborne’s valuation sums appeared to be based solely on publicly-available information – which covers less than 30 percent of the portfolio. In other words, he couldn’t possibly have got to a reliable value uplift estimate (especially a ten-figure one) based on the information he had. What’s more, it made no sense for Bramson to trumpet Sherborne’s turnaround credentials, since Electra doesn’t do turnarounds.

On the other hand, the statement said: “Over 50 percent of Electra’s realised investment returns have come through profits growth and, since 30 September 2010, Electra portfolio companies have grown profits at a weighted average compound rate of 9.2 percent.”

The big question now is whether Bramson has succeeded in rallying other investors to his cause – and that won’t become clear until the AGM, which is scheduled for October 6.

The good news for Electra is that it still has the analysts on side, most of whom appear to be pretty skeptical about Bramson’s grand claims. And Electra is unquestionably right that a strategic review would be a huge distraction, sucking up valuable management time and resource.

Two other notable data points: although Bramson has criticised Electra’s performance fees, analysts have pointed out that they’re not as high as Sherborne’s own fees. And according to Electra, since Sherborne’s vehicle was listed in 2012, the trust has outperformed it (on a share price total return basis) by 23 percent.

Plenty of shots fired, then. But who’s going to win the war?