Moments after more than 60 percent of shareholders at an extraordinary general meeting on October 6 last year voted to reject all the proposals put forward by Sherborne Investors’ Edward Bramson, Electra Private Equity announced it would be launching a review of its fee arrangements, capital structure and distribution policy.
Over the course of conversations with shareholders – in which Electra had sought to convince investors not to back Sherborne’s push for board seats – the board recognised that “these are topics of particular focus for all shareholders and that a review of them is appropriate at the present time”.
Fast forward four months, and the results of the review are in. Following what chairman Roger Yates called “tough and rigorous negotiations”, the UK investment trust decided to slash its management fees on cash and non-core investments, and repay its multi-currency revolving credit facility, henceforth using this facility only to temporarily fund new acquisitions.
Electra also decided to implement a dividend policy, and will now aim to return 3 percent of net asset value (NAV) to shareholders per annum through either a cash dividend or share buybacks, beginning with a cash dividend that will be declared in respect of the first six months of the current financial year at the time of the announcement of half year results in May.
“We wanted to make sure that we did something that shareholders could see year by year, and hopefully value more highly accordingly,” Electra chairman Roger Yates told PEI following the announcement.
For some, it was a long time coming. “[Listed PE firms] don’t all pay a yield, but they all have a buyback policy or return capital in some way or another,” says Charles Cade, head of investments companies research at Numis. “[Electra has] looked a bit of an oddity.”
But Electra’s policy could have gone further, Cade argues. 3i, for example, distributes 15 to 20 percent of gross cash realisations, with a minimum guaranteed dividend of 8.1 pence per share, currently equivalent to around 2.2 percent of NAV. This financial year 3i expects to pay at least 15 pence per share, around 4.1 percent of NAV.
“[It] was a bit half-hearted,” Cade says. “Three percent – it’s not clear whether that’s going to be used for buybacks or whether it’s a dividend, and it’s not really tied into how much is actually being realised from the portfolio.”
Even though Cade argues that all shareholders like to receive dividends, not everyone agrees that the new policy will be met with resounding approval.
“Do shareholders really want cash-back, when returns on cash are derisory, compared with Electra’s good long term performance record?” Oriel Securities partner Iain Scouller said in a note prior to the announcement.
Higher rate tax payers may not take too kindly to the dividend policy, Scouller thinks. Distributions are subject to income tax, whereas realising value through share sales is taxed at the more attractive capital gains rate.
As for Sherborne, the activist hedge fund has been gradually increasing its stake in Electra, pushing its shareholding up to 25.16 percent in February, possibly aided by a debt facility.
In its interim results, published in August, Sherborne said it had entered into a £50 million (€68 million; $76 million) unsecured term loan facility with a bank, which “may be used to purchase shares, debt or derivative securities of Electra Private Equity, plc. through 31 December 2014”. Oriel’s assumption is that the facility has been rolled over.
Sherborne may use Electra’s upcoming AGM on March 16 to show its hand, Scouller says.
“[Sherborne] could come back and say [it] want[s] people on the board, or come up with some other ideas,” he says. “It’s just not clear at this stage at all what the endgame is.” In other words, things are likely to get more interesting still.