What happens next in the battle over Electra?

It is rare for a fund’s investors to fire a manager, particularly if that manager is generating solid returns. So when London-listed Electra Private Equity announced in May that it had served 12 months’ notice on Electra Partners, it was momentous.

Electra Private Equity is an investment trust listed on the London Stock Exchange. Electra Partners, which has a 19-strong team in London, is an independent firm that has exclusively managed the investment trust’s portfolio for more than 25 years. The portfolio stood at £1.8 billion ($2.5 billion; €2.3 billion) at the end of March and accounted for 95 percent of Electra Partners’ source of funds.

By Electra Private Equity’s own admission, its portfolio has performed strongly. It reported an “investment return” of £517 million, or 35 percent of the opening portfolio, for the 12 months to 31 March.

But the decision was not a total surprise. It followed last year’s boardroom battle launched by the listed trust’s largest shareholder, Sherborne Investors. In a series of increasingly hostile exchanges between the activist investor and the board, Sherborne criticised the board’s independence, its relationship with the manager, the performance of the portfolio companies and fees.

Sherborne’s chief executive, Edward Bramson, ultimately won, obtaining shareholder backing in November for board seats for himself and Ian Brindle, a former chairman of PwC and latterly Sherborne itself. The board began a strategic review in January and in May added two further directors and a new chairman, appointing Bramson to the newly-created role of interim CEO, further boosting his say over Electra’s future.

“The decision to serve notice to Electra Partners is a pragmatic step that will allow the board to act on any specific recommendations of the review in a more timely way,” Electra Private Equity chairman Neil Johnson said.

While the listed entity has not ruled out retaining the services of Electra Partners, the implication is that the board is considering appointing another manager to what has been “one of the best performing listed private equity funds over a long period of time”, says Iain Scouller, managing director of investment funds at Stifel and a long-time analyst covering the listed private equity sector.

That raises a number of concerns, says Scouller. Key investment managers at Electra Partners might leave; the news will be unsettling for investee companies; and the uncertainty means new investments will be difficult in the months ahead.

A board decision to terminate Electra Partners’ management contract may seem simple, compared with negotiating the terms of a limited partnership agreement to remove an unlisted manager.

But a separation would not be painless. When a manager is removed, a key complication is the division of carried interest between the old and the new manager, which could diminish the economic incentive for another entity to take the fund on, says MJ Hudson partner Ted Craig.

The identity of the new manager remains unclear. In the meantime, Electra Partners managing partner Alex Fortescue, who took up his role in January, noted in a statement that he was “surprised and disappointed” at the board’s decision.

Fortescue appeared resilient in the face of losing its key client, noting it was already exploring other options. “We have established relationships with a number of investors and have received numerous expressions of interest from others,” he said.