Focus on Russia – Activist pressure brings hefty returns from listed Russian funds
Various listed Russian-focused funds in the process of winding up, often under pressure from shareholder activists, could make investors who bought their shares earlier this month 25% or more by the time they have returned capital, according to Jefferies.
The investment bank’s investment companies equities team made the calculations in a 10 August report on 19 funds either closing down or not making new investments.
This included seven portfolios focused on EMs, and four focused wholly or partly on Russia.
Based on their 10 August share prices, they could make investors an internal rate of return (IRR) up to 68% in one case (Aurora Russia) by the time their windings up / ‘harvesting’ activities have ended.
The closures are symptomatic of the broader listed fund universe.
Despite creditable returns in some cases, listed mutual and hedge funds could not withstand widespread selling of equities during and since 2008, and for many, share prices slumped far below the per share price of the funds’ investments (NAV).
Some remained at wide discounts to NAV on 10 August.
Shares in Aurora Russia, for example, traded 63% more cheaply than its investments per share on 10 August, while those of East Capital Financial Investors fund were trading at a 46.9% discount to NAV.
Jefferies’ team noted many listed emerging markets and hedge funds, including Aurora, are shutting after mechanisms to control their discounts to -NAV have failed to narrow the gap, and the persistently wide discounts then triggered shareholder votes on the funds’ future – which some have failed.
“In the emerging markets and listed private equity sector, shareholder activism has been more prevalent, contributing directly to a number of wind-down situations,” Jefferies’ team added.
The Aurora Russia private equity fund offers potentially the greatest IRR, of 68.5%, as the six-year old portfolio realises value from its four private equity investments including records storage business, OSG (38% of the portfolio), money transfer business, Unistream (22%), credit card bank, Flexinvest (20%); and a DIY retailer, Superstroy (20%).
The harvesting strategy follows a torrid time for Aurora, after a UK hedge fund pushed it to change its strategy in the face of a shareholder vote on its future in December 2010. A new board installed in mid-2011 said it would realise “tangible value” for shareholders on a two year time horizon.