Investment trust boards are rushing to sell at a discount

The net asset value (NAV) of an investment trust is supposed to represent what would be left if you sold all its assets and paid off all its liabilities. For trusts investing in liquid, large-cap listed stocks, the NAV should be pretty close to what you would get in reality. For small-cap funds, you might receive less if you were selling large stakes or liquidating very quickly, but you would hope that it’s a fair reflection of what you would eventually get if you were not a forced seller.

Funds that invest in unlisted assets – private equity, real estate, infrastructure and so on – are different. There’s no continuous market price for the assets, so the NAV is calculated from other data. These might include: recent private transactions for stakes in the same assets; prices at which comparable assets have sold; net present value based on forecast cash flows discounted back to today; or some other method.

So, NAVs for these funds are estimates. Still, one would hope to find that the assets should be worth close to NAV (or better) in the event of a non-forced sale, unless the board or manager are telling investors – as sometimes happens when a troubled trust is winding up – that they are no longer confident of achieving these prices.

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Lowball offers

So it feels frustrating to see many bids in sectors such as real estate and infrastructure that are pitched at a significant discount to NAV and still recommended by boards. With many of these funds trading cheaply, buyers are coming in with an offer that is above the prevailing price, but still below NAV. Sometimes, boards seem too quick to back lowball buy-out offers when many shareholders would prefer to remain invested.

The battle for Assura – which has happily swung back in favour of a merger with its peer Primary Healthcare Properties – is a case in point.

This week’s bid for Downing Renewables & Infrastructure (LSE: DORE) – which I hold – seems less likely to end satisfactorily. DORE has received a 102.6p per share bid, which the board has agreed. This is an 23% premium to the undisturbed share price, but a 7.5% discount to NAV (adjusted for the next dividend). DORE is small (net assets of £191 million) and consolidation in renewables is inevitable, especially when discounts remain this large. Still, a sale this far below NAV feels like a poor deal given that the trust appears to have a decent portfolio of assets and seems to be performing fairly well.

What makes this messy is that the bidder is Bagnall Energy, an inheritance tax relief investor that is run by Downing – ie, the manager of DORE. Bagnall has been invested in DORE since the initial public offering and increased its stake from 16% in early January to 25% by mid-February. This enlarged stake gives it a blocking vote on other bids, so a competing bid is unlikely. It is galling to see a big shareholder acquiring the full business at below NAV (no control premium). It is unpalatable that the manager has been getting fees based on higher NAVs, but argues that it is worth less when it wants to buy. And it is not persuasive to see the board say that this offer is “in the best interests of DORE’s shareholders as a whole”. Long-term investors will probably disagree.

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