17th Sep 2014 07:52
LONDON (Alliance News) - Sherborne Investors Wednesday gave further detail as to why it wants to launch a strategic review of Electra Private Equity PLC, as it wrote a letter to fellow shareholders asking them to support proposals that also demand a number of board changes at the FTSE 250 private equity investment trust.
Sherborne, which has built up a 19% stake in Electra, wants shareholders to back the appointment of both Richard Bramson, a partner and the portfolio manager of Sherborne Investors Management LP, and former Sherborne Investors (Guernsey) B Ltd Non-Executive Chairman Ian Brindle, to the trust's board. It is also demanding the removal of Electra board director Geoffrey Cullinan. However, Electra has previously rejected the requests and has previously criticised the activist investor for offering "no detail" as to the reasoning by its demands.
However, Sherborne Wednesday hit back in the battle, saying that the aggregate value of shareholdings in Electra could be increased by more than GBP1.0 billion with lower risks and less volatility than under the trust's current strategy.
"This is why we are proposing a strategic review and certain changes to the company's board of directors, to bring a fresh perspective that we believe will be in all shareholders' best interests," Sherborne wrote to fellow Electra shareholders.
Electra was not immediately available for comment.
In its letter to shareholders, Sherborne said that Electra's current directors' "combined commercial experience, according to public sources, appears to be limited."
"Electra has delegated substantially all of its operations to the investment manager and has no employees of its own," Sherborne said. "The board of the company has no executive directors and is instead comprised of six part time non-executive directors who set strategy for and monitor the performance of the investment manager," the activist added.
"We are confident that the directors are carrying out these roles diligently and to the best of their collective ability, but the board's current composition and relative lack of analytical and other support may have made the management of their relationship with the investment manager less effective," Sherborne wrote.
If passed, Sherborne's proposals would result in Electra's board being comprised of seven non-executive directors, two of whom would be Sherborne nominees. It said its nominees would stand for election every year and wants the remaining directors to do so as well.
Sherborne said Electra has the hallmarks of the type of opportunity it looks for when making investment decisions, arguing that the trust has underperformed for many years and that many of those causes are "identifiable" and can be corrected.
According to the activist shareholder, Electra's performance is best measured against the FTSE 250 index because it itself is a constituent. In doing so, Sherborne said that Electra's use of the FTSE All-Share was "less relevant" than using the FTSE 250 as a benchmark. It cited figures which it said show that Electra's investment portfolio would have failed to beat an investment in a relatively simple and inexpensive FTSE 250 tracking fund in each of the last seven years.
"The major reason for this underperformance appears to be that as successful investments, made by the company 15 or more years ago, were disposed of, the investments that replaced them were substantially less attractive," Sherborne wrote to shareholders.
The activist said its analysis of Electra identified a number of areas that require attention in order to understand the reasons for what it calls the deterioration and the feasibility of a turnaround.
"Fifteen years ago, when Electra's returns were considerably better than they are now, there were only 341 competitors bidding against Electra for similar investments versus the 1,305 today. In our view, as a result of increased competition, Electra's past practice of financial engineering and seeking preferential access to favourably priced investments has proved to be no longer adequate to produce competitive returns," Sherborne wrote.
Citing a study called 'Value Creation in Private Equity' by Capital Dynamics and the Technische Universität München, published in June, Sherborne said more than half of all private equity returns are now the result of operating improvements in companies that funds acquire. It accused Electra of falling behind the times in that area.
Sherborne also questioned Electra's track record of utilising borrowing to improve shareholder returns, and said "it is important for the strategic review to reconsider the conditions, if any, under which the board would borrow to gear the company's balance sheet in the future."
In addition, Sherborne claimed that investment expenses have absorbed more than 42% of the total return on Electra's investments, reducing shareholders' net asset value by approximately GBP275.0 million over the period. It said those expenses create a "very significant burden on returns to shareholders" and called for its proposed strategic review to "establish a framework for appropriate levels of investment expenses for the future as a means to improve the returns earned on shareholders' capital."
The shareholder vote is scheduled for October 6.
Electra shares were Wednesday morning up 0.7% at 2,750 pence.
By Samuel Agini; [email protected]; @samuelagini
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