Sherborne Investors' shareholder victory over Electra

On 5 November shareholders in Electra Private Equity voted in a meeting demanded by its largest shareholder Sherborne Investors, to parachute two Sherborne nominees on to the board. The result, which left some retail investors in shock, marked a victory for Sherborne partner Edward Bramson and his associate Ian Brindle who had been seeking board representation at the listed investment trust for more than a year.

It brought to an end the public hostilities between activist investor Sherborne and Electra’s board, which had stringently resisted the move. In a circular to shareholders on 21 October, the then chairman Roger Yates accused Bramson of making “a series of ill-judged, ill-informed and ill-founded claims about the company and its board” and demanded he outline his plans for Electra.

What those plans are is still unclear. In a separate statement from Sherborne following the vote, it said that the new directors “look forward to working together with their board colleagues in undertaking a strategic review to consider all options in order to maximise long-term value for all shareholders”.

As yet, no review is understood to be underway. It is unclear what will happen next, or what the appointments mean for the management team or the firm’s future strategy, including sourcing or attracting investee companies, notes Winterflood analyst Innes Urquhart. “It’s not particularly helpful.”

In an analyst note Stifel speculated that Bramson might push for a return of cash to shareholders funded through leverage, which it said was a “bad idea”. Or alternatively the new directors might “decide to sit back and see if the management team can continue to deliver their average 10-year return of 13 percent per annum” and start to think about an exit strategy.

For listed investment trusts generally, the result of the Electra vote has caused anxiety as to who might be targeted next. The shares of listed trusts in the UK typically trade at around a 20 percent discount to their net asset value (NAV), and the outcome at Electra is a reminder to their boards that they cannot let the gap stretch too wide.

Among the previous board’s objections to Bramson and Brindle’s appointments was the contention it would destabilise the relationship between it and Electra Partners, which manages its portfolio.

For its part, Sherborne’s chairman, Talmai Morgan, said in an interim report in August that it continued “to believe that Electra represents an attractive investment opportunity resulting from the investment manager’s [Sherborne] participation in an operating turnaround”.

Sherborne’s criticism of the board included its lack of independence from its investment manager, fee practices, operating performance, corporate governance and “misleading financial disclosures”.

Electra’s board maintained that performance was excellent. On 30 September, it reported its full-year results showing net assets of £1.5 billion ($2.3 billion; €2.1 billion) and a NAV per share of 3,914p.

The result of November’s vote was always going to be close and hinge on turnout, analysts told Private Equity International beforehand.

With crucial institutional backing, Sherborne’s resolutions passed with a slim majority of 53.5 percent of votes cast, equivalent to about 16.6 million votes in favour of each nominee, on an 85 percent turnout.

It was the second time the proposal had been put to Electra shareholders. In October 2014, they rejected the appointment of Brindle and Bramson by 61.8 percent of votes cast on turnout of 81 percent.

Since then, Sherborne had upped its stake in the listed investment trust from about 20 percent to 29.9 percent, just below the mandatory offer threshold.

At the shareholder meeting, several private investors expressed frustration that Bramson had not addressed them directly to lay out his plans for the firm, and one said he feared Sherborne was seeking to take control without pursuing a bid for the whole company.

Bramson seized the chairmanship at F&C Asset Management in 2011 through a boardroom coup, citing high costs and lack of strategic direction, and had ambitions to build a stake in listed management firm 3i.

With the support of about 45 percent of the share capital, Charles Cade, head of investment companies research at Numis Securities, Sherborne’s house broker, notes that Bramson and Brindle “can’t be ignored” and are likely to have a role in the selection of the new chairman after Yates’s immediate resignation following the vote and the appointment of Kate Barker as interim chair. “They have made positive noises about working with Kate Barker,” he added.