Statement re Henderson Private Equity Inv Trust
January 22 2010 - 10:57AM
UK Regulatory
TIDMADU TIDMHPEQ
RNS Number : 0169G
Advance UK Trust PLC
22 January 2010
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Statement re: Henderson Private Equity Investment Trust PLC
Advance UK Trust PLC requisitioned a meeting of shareholders of Henderson
Private Equity Investment Trust PLC to be held on 2 February 2010. We asked that
Henderson Private Equity's directors come up with proposals to address their
twin problems of the low rating of their shares and their illiquidity. In the
circular convening the meeting the directors of Henderson Private Equity said
they did not believe there was any action they could take in the short term to
improve the lot of shareholders, we disagree. We do not believe that
shareholders' best option is to sit and wait for a recovery in the private
equity market. We were contacted recently by Edmond de Rothschild who suggested
they take on the management of the fund and run off the portfolio, returning the
proceeds to shareholders over time. We believe the adoption of such a policy
would trigger a re-rating of the Company's shares. Having secured their
permission, we reproduce their letter to us below and recommend this course of
action to the Board of Henderson Private Equity.
22nd January, 2010
Dear Mr. Carthew,
Henderson Private Equity Investment Trust PLC ("HPEQ")
Following your requisitioning of an Extraordinary General Meeting of HPEQ on
16th December, 2009 and the subsequent circular to shareholders of HPEQ sent on
6th January, 2010 convening the Extraordinary General Meeting, we contacted you
to discuss how the significant discount at which HPEQ's shares trade relative to
net asset value could be narrowed. As requested, this letter sets out our
thoughts on how HPEQ should be managed in order to reduce the discount.
In the statement issued on your behalf by Northern Trust, it was stated that, on
the basis of its then market capitalisation of GBP23 million, HPEQ was trading
at a discount of 59 per cent. to net asset value compared with the average
discount for listed private equity fund-of-funds of 37 per cent. We believe that
the reasons for this substantial discount against HPEQ's peers include:
* the small size of HPEQ's market capitalisation, which discourages liquidity and
institutional interest in the shares.
* concern about HPEQ's ability to finance its commitments due to:
i. the likelihood of heavy calls from funds over the next 12 to
18 months when they perceive that we
are at the bottom of the economic cycle and so start to make
investments again;
ii. the possibility that HPEQ will face calls from funds,
even if their investment periods have expired,
for equity cures where portfolio companies have financing
issues;
iii. the probable continuation of the famine in
realisations over the coming period as funds wait for
profits and valuations to recover, so that they can sell
businesses at a decent premium to cost;
and
iv. the dependence on the GBP10 million and GBP20 million loan facilities
provided by the Bank of Scotland,
which are committed until July 2010 and July 2011 respectively
and whose renewal is uncertain.
We consider that the likelihood of effecting a merger between HPEQ and another
listed private equity fund-of-funds, intended principally to narrow the
discount, is quite unlikely in the near-term. It would be extremely difficult to
agree acceptable terms when HPEQ's shares are trading at such a substantial
discount and, in any event, the number of potential merger parties is highly
limited. Moreover, such a merger would not necessarily act to reduce the
discount and other measures may well have more immediate effect.
We appreciate that many changes have occurred in how HPEQ is managed over the
past three years, but note the Board's view that, in relation to current policy,
"...it may take some time before it has a significant positive effect". We
strongly believe that a change of policy should be implemented as a matter of
urgency with a view to narrowing the discount and that it should principally
involve:
* institution of a run-off policy with a view to liquidating HPEQ over a period
of, say, five years, with the proceeds being distributed to shareholders on a
tax-efficient basis.
* implementation of a cash-conservation strategy to ensure that HPEQ has
sufficient liquidity to meet its commitments. This would include:
i. discussions with the Bank of Scotland with a view to
extending the maturities of the two loan
facilities;
ii. detailed analyses
of likely cash calls over the next 24 months, HPEQ's ability to finance those
calls, and alternative financing sources;
iii. the prioritisation of funds and investments to ensure that those most
likely to generate superior
returns are supported first; and
iv. a review of administrative expenses which, prima facie, seem high by
industry standards.
We have absolutely no doubt that the foregoing change in policy could be
implemented within the three-month period within which you requested HPEQ's
Board to develop proposals to narrow the discount to net asset value. We believe
that we would be uniquely well-qualified to develop and implement the above
strategy, given that:
* We manage two fund-of-funds targeting funds operating in the Western European
lower mid-market buy-out segment and so we have a team dedicated to the segment
where HPEQ is investing. The team, which has extensive knowledge of, and
relationships in, this segment, exclusively follows this segment, and is in it
for the long-term.
* We are currently raising a fund to invest in secondary transactions in the
segment and, indeed, have carried out a number of such transactions in our
fund-of-funds. The team, therefore, has the expertise to source, negotiate and
execute secondary transactions on behalf of HPEQ: whilst in the immediate
environment it is unlikely that the secondary market will optimize value for
HPEQ, we believe that it could play a significant role over time.
* The team has extensive experience in negotiating financings such as may be
involved in the discussions with Bank of Scotland or alternative sources of
funding.
* We believe that we can develop a compensation structure which would be lower
than the management and performance fees charged by the current managers and
which, in basing the performance fee on share price performance, would create a
much closer alignment between shareholders and the manager.
We very much hope that you will be able to persuade the Board of HPEQ of the
merits of these proposals.
Yours sincerely,
D. G. Seligman
END
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