Shareholder activism is not something usually associated with private equity. For that reason, the outcome of a vote by shareholders in Electra Private Equity this week is a milestone that all listed private equity investment vehicles, management companies and trusts – and not just London-listed ones – should take note of.
Buoyed by institutional support, Sherborne Investors succeeded in its proposal to appoint its nominees Edward Bramson and Ian Brindle to Electra’s board, despite the board’s opposition. Among objections, the board argued their presence would disrupt the relationship with Electra Partners, which manages its portfolio.
The result left the general meeting held in London yesterday in stunned silence and prompted the immediate resignation of chairman Roger Yates.
As one industry insider told Private Equity International: “It is causing some anxiety as to who the next target will be. Electra has been a good performer, it is pretty much at the top of the table.”
What will happen next at Electra is uncertain, and that is “not helpful” in the words of one analyst. The arrival of potentially disruptive and previously hostile board members has implications for the existing management team and also potential target investments, as companies may be put off by the “activist” association, he speculated.
Bramson, who seized the chairmanship of F&C Asset Management in 2011, citing high costs and lack of strategic direction, and had ambitions to build a stake in 3i, is pushing for a strategic review at Electra “to consider all options in order to maximise long-term value”.
With about 45 percent of share capital backing them, a new board of eight is likely to take notice of its new members. Such potential influence over direction, including investment strategy, would not sit comfortably with many private equity firms.
It’s a reminder that shareholder activism is on the rise, and private equity is not immune. There have been 860 actions launched globally in the first nine months of this year against listed entities, setting 2015 on track to be a record year, according to research from law firm Linklaters. Of these, almost a third in Europe are targeted at financial companies and half in the UK seek board representation.
Although analysts maintain there are no obvious candidates for another shareholder crusade, listed private equity trusts that feed funds to managers are vulnerable as their shares typically trade at a discount to net asset value (NAV). That is part of listed private equity’s appeal, after all.
In the UK, the average discount to NAV is 20 percent, according to Numis Securities. Boston-based HarbourVest Global PE, which moved to the main market of the London Stock Exchange in September seeking greater liquidity, trades at a 21 percent discount, while another well-regarded vehicle, HgCapital Trust, trades at an 18 percent discount to NAV.
Even firms that are performing well cannot afford to let the gap between NAV and the share price remain too wide over the long term. Boards need to keep an eye on their share price and the interests of their shareholders by focusing on returns, watching costs, improving disclosure, working on corporate governance and perhaps, in some cases, introducing distributions or a buy-back policy.
And it’s not just investment trusts. Listed private equity firms, which usually trade at a premium, are also making changes.
As part of a shift in strategy that should lock in longer-term public investors, New York-listed KKR switched its dividend policy last month from a variable rate that reflects gains on fund investments to a fixed distribution as it invests off its balance sheet. In terms of yields, it’s aligning itself with listed financial peers beyond private equity.
Of the change, co-founder Henry Kravis and George Roberts said: “Over time, we think the market will value what we do with our balance sheet, including repurchasing our own units, more than the variable distributions we have been paying. These changes, coupled with continued investment performance, will allow us to create significant long-term equity value for our unitholders.”
Listed private equity will be hoping to win similar shareholder loyalty.