PF Matters: Quit while you're ahead

It comes as activist investor Edward Bramson is appointed chief executive officer (CEO) of the trust on an unpaid interim basis.

Electra Private Equity's share price fell after the announcement on 26 May from about 3,965p, though has stabilised and earlier this week was trending upwards at around 3,840p.

Former Aviva Investors chief investment officer David Lis and Paul Goodson, a former managing director of Barclays Private Equity, have also joined the board as non-executive directors, while Josylane Gold steps down. The board is now searching for a CEO and chief financial officer.

Perhaps Mr Bramson's CEO appointment is not surprising: last year he was appointed to the board with Ian Brindle after his investment vehicle Sherborne Investors (SIGB) acquired around 28 per cent of Electra's shares. Then in January this year Electra's new board launched a strategic review of the trust's investment strategy, policy and structure which will be completed in the autumn.

Sherborne Investors started building a stake in Electra in 2014 and Mr Bramson tried to get onto the board later that year, but this was overwhelmingly voted down by shareholders. Mr Bramson argued at the time that 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.

A second attempt a year later succeeded after Sherborne increased its stake and gained the backing of large institutional shareholders such as Fidelity, Aviva and Insight - even though Electra had in the interim conducted its own review and implemented changes including a reduction in fees, the introduction of dividends and share buybacks.

But terminating a contract with a manager which has delivered strong returns does seem bizarre. Regardless of Sherborne's claims, this trust has delivered strong returns over the years: its net asset value (NAV) returns are the among the best of all private equity trusts over one, three and five years, and way ahead of listed equity indices such as the FTSE All-Share and FTSE Small-Cap. Electra also has a discount tighter than many of its peers, which was also tight relative to its own history when Sherborne initiated its holding.

Sherborne's action with Electra is unusual because activist investors typically take stakes in investment trusts trading at relatively wide discounts to NAV which have resulted from poor performance.

"It is odd that a fund which produced such good returns is in this position," says Peter Walls, manager of Unicorn Mastertrust (GB0031218018) which has a holding in Electra.

Source: Winterflood as at 6 June 2016

Electra's board says it has terminated the contract "to provide it with the flexibility to put in place any potential changes as an outcome of the review without any undue delay".

The contract termination includes a notice period of 12 months and Electra's board is exploring a range of options, including retaining Electra Partners as investment manager under "a mutually acceptable agreement". However, Electra's board admits that over the next 12 months "there may be some constraints on the rate of new investments".

Making investments might be difficult because companies might not wish to strike a deal with Electra knowing they might soon be dealing with someone new, making it less clear if the investment in them will be long term.

"Relationships with the existing portfolio companies could well be strained," adds Simon Elliott, head of the investment trust research team at Winterflood. "We would expect the better-placed portfolio companies to look for an escape route, while others will be increasingly wary of their future. The loss of future value that this could generate could be considerable."

This may be a good reason for prospective investors to opt for another private equity trust. Charles Cade, head of investment companies research at Numis Securities, says he "finds it hard to make a recommendation on Electra until the results of the strategic review are released [as] it remains unclear who will be managing the portfolio in the long term".

And analysts at Winterflood say: "Since Mr Bramson's ascension in November last year we have consistently held the view that, despite the possible upside in the investment portfolio, we could not recommend Electra while its future was so uncertain… and sympathise with minority shareholders who wish to sell."

Mr Cade says there are a number of other private equity investment trusts which seem to offer value as they have good portfolios such as HgCapital (HGT), HarbourVest (HVPE), Pantheon (PIN) and SVG Capital (SVI).

He also says raising the funds to invest into one of these could be an argument for existing shareholders to sell Electra, though adds: "the largest companies in Electra's portfolio are doing well and I wouldn't like to panic people into selling. Maybe existing shareholders should keep a bit of their money in there".

Mr Bramson is a turnaround specialist, some of the trust's current board have private equity experience, and doubtless they will look to appoint a chairman and CIO with good credentials. If they get it right the trust's share price might do well - especially if Electra Partners is reappointed as manager.

If you have recently invested and are sitting on a loss, maybe you should give it a chance. But if you have held Electra for years and made a strong profit, even after the recent share price fall, maybe you should quit while ahead. Electra also has a relatively high ongoing charge of more than 3 per cent.

Consistent strong returns might justify this. But it is a high price for uncertainty, especially when a number of Electra's peers have lower ongoing charges, wider discounts to NAV despite strong performance records and - crucially - a clearer future ahead.