Saba Capital Management, a New York-based activist investor hedge fund, may be targeting more UK-listed closed-ended funds in the run-up to the general meeting it requisitioned with shareholders of Edinburgh Worldwide (EWIT).
On 13 January, Saba disclosed that it had written to the board of real estate investment trust (REIT) Workspace Group (LON:WKP) on 8 January urging it to proceed with a managed wind-down (a process whereby the fund sells off its assets in preparation to cease operations).
The letter highlighted that Workspace was trading at a discount to net asset value (NAV) of 45%, among the highest in Saba’s database of REITs.
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“Despite a stable operating platform and capable management team, an increase in valuation has not been realised,” said Paul Kazarian, partner at Saba Capital Management in the letter. “Instead, the discount has become entrenched, signalling lack of confidence from the market that the company can deliver equity value through long-term reinvestment or expansion.”
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Kazarian also highlighted refinancing challenges and structural impediments in the shareholder base (specifically that a small number of shareholders hold a high proportion of its shares, constraining liquidity and hampering the potential of shares to increase in value).
“We believe that the Company’s assets would have a higher value, closer to NAV than the current share price, if offered to a larger acquirer or acquirers with the resources available to maximise their cash flows, reduce operating costs and finance them at a lower cost,” said Kazarian. “A managed wind-down would allow NAV to be realised directly rather than waiting for a persistently sceptical market to recognise it.”
The letter emerged a week before shareholders in Edinburgh Worldwide (LON:EWI) are due to vote on Saba’s proposals to displace its board with three independent directors of its own choosing. The proposal will be voted on at a general meeting scheduled for 20 January.
Herald and Impax Environmental Markets attempt to ward off Saba
The disruption that Saba is causing at some closed-ended funds is prompting the managers of others in which Saba holds a significant stake to take preventative action.
On 9 January, Herald Investment Trust (LON:HRI) – which, like EWIT, was one of the seven trusts that defeated Saba’s proposals last year – issued a tender offer that would enable shareholders to redeem their shares in the trust at or close to NAV.
The offer is conditional on Saba tendering all (or materially all) of its holding in HRI, which was 30.7% at the time of Herald’s proposal.
“This proposal will enable long-term shareholders to remain invested with the current successful manager and mandate they have chosen, while also providing a full exit route to short-term shareholders,” said Andrew Joy, chairman of Herald Investment Trust. In other words, it offers shareholders that doubt the current management’s ability an exit route, without relinquishing control of the trust.
“The board has assessed that it is not sustainable to do nothing given that a process of attrition may eventually see Saba able to win a simple majority vote even though it itself is a minority shareholder,” said Joy. “Accordingly, the board has carefully considered a wide range of options, including during lengthy discussions with Saba.”
Impax Environmental Markets (LON:IEM), of which Saba holds 20.7% of shares, put forward a similar offer on 16 January.
Saba hasn’t yet called for any action from IEM, but IEM’s board appears to believe that the large shareholding built up by the hedge fund is destabilising and that Saba is positioning to move the trust’s strategy away from its current focus on environmental markets.
IEM is currently the only UK-listed investment trust that targets environmental solutions.
“The board cannot stand by while Saba’s actions create an environment of uncertainty and risk for all our shareholders,” said Glen Suarez, chairman of IEM. “The continuation tender offer proposed today is designed to provide shareholders with the choice to exit at close to NAV if they have a short-term investment horizon, or to remain invested in IEM and benefit from the long-term growth prospects of an environmental markets strategy, once Saba’s destabilising influence has been removed.”
As of 15 January (the day before the tender offer was announced), IEM shares traded at a discount of 8.85% to NAV.
Both the investment trusts’ boards have outlined a backstop tender offer proposal that will be put forward in the event that Saba blocks the continuation tender offer (which it is able to do given the size of its shareholding). This would require a lower voting threshold to implement, meaning Saba couldn’t block it unilaterally.
Both trusts’ boards say that this will give shareholders the opportunity to redeem their shares at close to NAV without being forced into remaining invested in a vehicle that Saba effectively controls.
