Electra Private Equity (ELTA) Investment Trust has rebutted a number of claims made by activist investor Sherborne Investors Management (SIGB) in a letter to its shareholders, which it says contains "unverifiable statements and unsubstantiated claims".
Since February, Sherborne has built up a 20 per cent stake in Electra. It is proposing that Edward Bramson, partner at Sherborne, and Ian Brindle, a former UK chairman of PricewaterhouseCoopers, be appointed to Electra's board. It also requests the removal from Electra's board of director Geoffrey Culinan, and Sherborne says that if the resolutions are passed it will conduct a strategic review of Electra.
Electra has convened a general meeting for 6 October.
In a letter to Electra's shareholders last week, Sherborne said Electra's investment performance has been in decline for a number of years but with certain changes in approach, the aggregate value of shareholdings in Electra could be increased by more than £1bn with lower risks and less volatility, which would equate to a share price of around 6,000p. Electra's share price is now 2,670p.
Electra argued that this is unsubstantiated. "There is no explanation as to what these certain changes are and no detail is provided as to how there would be lower risks and less volatility than under the current strategy," said Electra's board.
Sherborne also said Electra has underperformed the FTSE 250 Index over the last six calendar years and this is a relevant index as its unlisted holdings are of a similar size to these companies.
But Electra and analysts at JPMorgan Cazenove have said Sherborne's numbers are misleading as only the data for 2004 is calculated over a period of 10 years. Electra also argues that its performance record is not declining and that it is meeting its return target of a 10 per cent to 15 per cent annualised return on equity: over the 10 years to 31 March 2014 the trust has delivered a 14 per cent annualised return on equity.
JPMorgan Cazenove adds that Electra targets companies with an enterprise value of up to £300m, while the average enterprise of the FTSE 250 (ex investment companies) is £1.93bn.
Morningstar data on share price cumulative returns, meanwhile, shows that Electra has beaten the FTSE 250, the FTSE Small-Cap and its Morningstar listed private equity sector peers over, one, three, five and 10 years.
| 1-year share price return (%) | 3-year cumulative share price return (%) | 5-year cumulative share price return (%) | 10-year cumulative share price return (%) | 1-year NAV return (%) | 3-year cumulative NAV return (%) | 5-year cumulative NAV return (%) | 10-year cumulative NAV return (%) | |
| Electra Private Equity ord/Inc | 19.196 | 101.967 | 131.972 | 250.610 | 11.213 | 34.656 | 89.084 | 272.187 |
| FTSE 250 TR GBP | 7.453 | 72.860 | 94.899 | 230.149 | 7.453 | 72.860 | 94.899 | 230.149 |
| FTSE Small Cap TR GBP | 5.760 | 69.229 | 75.080 | 121.897 | 5.760 | 69.229 | 75.080 | 121.897 |
| Morningstar listed private equity UK sector average | 8.955 | 72.760 | 97.301 | 51.232 | 8.955 | 72.760 | 97.301 | 51.232 |
Source: Morningstar, as at 22 September 2014
Sherborne said Electra's borrowings via zero dividend preference shares and a convertible note in 2009 and 2010 were not immediately deployed but rather placed in cash which does not make much of a return. Although Electra has started to invest more recently, markets are around 70 per cent higher than in 2009 so it has missed its opportunity.
Electra argues that in the wake of the global financial crisis it took the opportunity to secure diversified long-term finance allowing it to continue to make investments at a time when traditional bank financing was not as readily available.
"This prudent capital structure management not only ensured Electra's stability at a time when many other investment vehicles required emergency fundraisings or comprehensive restructuring to survive but also ensured that, as global markets have recovered, Electra has been able to deploy capital in attractive investment opportunities," says its board. "These most recent investments are already generating returns."
"It is a fair criticism in hindsight that Electra has held too much cash," comment analysts at Investec. "Post the financial crash, Electra found it difficult to obtain traditional gearing and so issued zeros and convertibles as a way of obtaining long-term finance - albeit quite expensively. It is likely that the zeros will be repaid and the convertibles will convert into equity early."
Sherborne also said that over the last five years investment expenses have absorbed more than 42 per cent of the total return on Electra's investments, reducing net asset value by £275m.
Electra says its fees charged are broadly in line with the market standard.
Electra has an ongoing charge of 2.56 per cent, which is high relative to mainstream investment trusts but in line with some of its private equity peers, albeit still at the higher end.
Sherborne also said its experience in turnaround investing could benefit Electra, while the commercial experience of Electra's directors is limited. Electra countered that it does not invest only or predominantly in turnaround companies but focuses on growth, and since 30 September 2010 its portfolio companies have grown profits at a weighted average compound rate of 9.2 per cent. It adds that its directors have direct and relevant experience in private equity.
