TIDMDNE
RNS Number : 4291U
Dunedin Enterprise Inv Trust PLC
07 April 2016
DUNEDIN ENTERPRISE INVESTMENT TRUST PLC
PROPOSED CHANGES TO INVESTMENT OBJECTIVE AND POLICY
Introduction
As announced on 18 February 2016, following a review of the
Company's investment strategy and consultation with major
Shareholders, the Board has concluded that it would be in the
interests of Shareholders as a whole to conduct a managed wind-down
of the Company over a period of time. This will require changes to
the Company's current investment objective and policy. As the
proposed changes to the Company's investment policy are material,
they are subject to the prior approval of Shareholders in
accordance with the Listing Rules.
A general meeting of the Company to consider an ordinary
resolution to approve the proposed changes to the Company's
investment objective and policy has been convened for Wednesday, 11
May 2016. The Directors are unanimously recommending that
Shareholders vote in favour of the resolution to be proposed at the
General Meeting.
A circular containing further details of the proposed changes to
the Company's investment objective and policy and related matters
and the notice convening the General Meeting will be posted to
Shareholders later today. Copies of that circular will be available
shortly at www.dunedinenterprise.com and at
www.morningstar.co.uk/uk/nsm.
Enquiries
Graeme Murray Dunedin LLP T: 0131 225 6699
Sue Inglis Cantor Fitzgerald Europe T: 020 7894 8016
Background to, and Reasons for, the Proposals
In the months preceding the announcement on 18 February 2016,
the Board, in conjunction with its advisers, reappraised the future
prospects for the Company and consulted with Shareholders.
In reaching its decision to recommend a managed wind-down of the
Company to Shareholders, the Board was influenced by several key
factors, including:
-- the decreasing size of the Company (in part a consequence of
dividend payments of GBP10.6 million and GBP45.0 million of capital
having been returned to Shareholders under the distribution policy
introduced in November 2011);
-- the Company's flat investment performance; and
-- the substantial discount at which the Shares trade relative to their NAV.
The combined effect of these factors is that the Company's
market capitalisation is now only around GBP66 million,
exacerbating the lack of liquidity in the Shares which many larger
institutional investors and wealth managers require for regulatory
and risk reasons. This backdrop makes generating new investor
interest in the Company increasingly challenging.
On a more positive note, on 18 February 2016 the Board also
announced that the Company's largest investment, CitySprint, had
been realised generating proceeds of GBP26.1 million for the
Company (of which GBP7.3 million has been rolled over into a new
CitySprint company). The proceeds represent a return of 2.75 times
over five years on the original investment of GBP9.8 million when
taking account of income previously received.
Some 34 per cent. of the Company's investments, particularly
through Dunedin Buyout Fund III, continue to be in the active
investment phase and subject to ongoing drawdown of uncalled
commitments. However, the majority of the Company's current
portfolio (including the 42 per cent. held through Dunedin Buyout
Fund II) is relatively mature. In the Board's opinion, the more
mature investments offer the prospect of good realisations in the
short to medium term. Based on its belief that there is significant
inherent value in the underlying investments in the Company's
portfolio, the Board has concluded that the best way to maximise
value for Shareholders would be to implement a plan that allows the
Company's investments to be realised in an orderly manner over a
period of time and cash to be returned to Shareholders
progressively. Similar plans have been followed successfully by
other private equity investment trusts, such as Northern Investors
Company plc and Mithras Investment Trust PLC.
If Shareholders approve the Proposals at the General Meeting,
the Company will remain a listed investment trust but with the sole
purpose of returning cash to investors over time as the Company's
investments are realised, ultimately leading to the voluntary
liquidation of the Company.
Benefits of the Proposals
The Board believes that the Proposals offer the following
significant benefits to Shareholders:
-- Commencing a managed wind-down of the Company, rather than
placing it in liquidation immediately or seeking an immediate sale
of its portfolio, should enable the Company to achieve an
appropriate balance between maximising the value of its portfolio
and returning cash to Shareholders.
-- Following the announcement of the sale of the Company's
largest investment and the Proposals on 18 February 2016, the Share
price closed at 335p (up 42p from the previous day's closing
price). As at 5 April 2016 (the latest practicable date prior to
this announcement), the Share price was 323.5p, representing a
discount to the NAV per Share as at 31 December 2015 of
approximately 36 per cent. The Board expects that the
implementation of the Proposals will lead to a further narrowing of
the discount over time.
-- Since the Company will remain listed throughout all (or most
of) the realisation period, subject to market conditions,
Shareholders and prospective investors will be able to buy and sell
Shares on the London Stock Exchange.
Proposed Changes to Investment Objective and Policy
Introduction
Implementation of the Proposals will require material changes to
the Company's investment objective and policy. The Company's
current investment objective and policy and the proposed changes to
them are set out below.
Current Investment Objective and Policy
"The Company's objective is to target a rate of return on equity
in excess of 8 per cent. per annum over the long-term. The Company
aims to achieve its investment objective by investing principally
in private equity funds managed by Dunedin.
In 2011 the Company changed its investment policy so that in
future it will invest only in direct private equity investments or
via private equity funds managed by Dunedin.
In future the Company does not intend to make any new
commitments to, or any new investments (other than investments
resulting from existing commitments) in private equity funds
managed by managers other than Dunedin. Investments in the existing
European funds portfolio may be held to maturity, with any
associated outstanding commitments being met when called, although
the Directors reserve the right to sell all or any such
investments, together with any associated outstanding commitments,
prior to maturity, if they believe that this is in the best
interests of Shareholders.
Accordingly, the mix of investments by the Company among direct
investments and investments via private equity funds managed by
Dunedin or by managers other than Dunedin will vary from time to
time. In the medium to long term, the exposure to the European
funds portfolio will decrease as the funds in the portfolio mature
or the Company's interests in them are sold.
Ultimately, the Company will invest in private equity funds
managed by Dunedin, specialising in the provision of equity finance
for management buyouts, management buyins and growing businesses in
the UK lower mid-market (i.e. businesses with an enterprise value
typically in the region of GBP20 million - GBP100 million). It is
anticipated that the Company may also make direct investments in
the form of co-investments alongside private equity funds managed
by Dunedin in which the Company is also invested.
Not more than 15 per cent. of NAV (measured at the date of
investment) will be invested, directly or indirectly, in any single
company or group of companies (measured at the date of investment).
Investments are made across a range of business sectors.
Investments are structured to deliver capital growth for the
Company using a variety of financial instruments, including
ordinary shares, preference shares, loan stock and mezzanine debt,
either directly or through commitments to limited partnership
funds.
The Company does not invest in other listed closed-end
investment funds. Cash balances are held either on cash deposit or
in gilts or cash liquidity funds.
In common with most investment companies, the Company may borrow
to finance further investment. Although the Company is permitted by
its Articles of Association to borrow an amount equal to the amount
paid up on the issued share capital and the total amounts standing
to the credit of the capital and revenue reserves of the Company,
the Board's policy is that financial gearing will not exceed 40 per
cent. of gross asset value."
Proposed Investment Objective, Policy and Strategy
Under the Proposals, the Board is proposing that the Company's
investment objective be restated as follows:
"The investment objective of the Company is to conduct an
orderly realisation of its assets, to be effected in a manner that
seeks to achieve a balance between maximising the value of the
Company's investments and progressively returning cash to
Shareholders."
In view of the proposal to realise the Company's investments,
return surplus capital to Shareholders and ultimately wind up the
Company, it is proposed that the Company's entire existing
investment policy be replaced and, subject to the resolution being
passed at the General Meeting, the Company will adopt and adhere to
the following investment policy (which will be published each year
in the Company's annual report and accounts in accordance with the
Listing Rules, commencing with the annual report and accounts for
the year ending 31 December 2016):
"The Company's investment policy is to invest primarily in
private equity investments, either through private equity funds
managed by Dunedin or directly.
The Company may not make any new investments save that:
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(i) investment may be made to honour commitments to funds under
existing contractual arrangements;
(ii) further investment may be made into the Company's direct
investments in order to preserve the value of such investments;
and
(iii) realised cash may be invested in liquid cash-equivalent
securities, including short-dated corporate bonds, government
bonds, cash funds or bank cash deposits pending its return to
Shareholders in accordance with the Company's investment
objective.
No more than 10 per cent. of the Company's total assets may be
invested in any single cash equivalent instrument or placed on
deposit with any single institution, except that this limit does
not apply to investment in government bonds, which shall be
unconstrained.
The use of gearing shall be limited to the investment of up to
GBP20 million of borrowed funds or, if less, 20 per cent. of the
Company's NAV (measured at the time of drawdown).
The Company will not invest in other listed closed-end
investment funds.
The Company will continue to comply with the requirements of UK
investment trust legislation and the restrictions imposed on
closed-ended investment funds by the Listing Rules in force from
time to time.
In common with most investment companies, the Company may borrow
to finance further investment. Although the Company is permitted by
its Articles of Association to borrow an amount equal to the amount
paid up on the issued share capital and the total amounts standing
to the credit of the capital and revenue reserves of the Company,
the Board's policy is that financial gearing will not exceed 40 per
cent. of gross asset value."
Any material change to the new investment policy would require
Shareholder approval in accordance with the Listing Rules.
The Board will meet regularly:
-- to review progress in, and the strategy for, implementing the
Company's new investment objective and policy; and
-- to evaluate the then current position and prospects for
unrealised investments, the strategy for outstanding commitments to
existing funds, the Company's working capital requirements
(including uncalled fund commitments) and the level of any surplus
capital.
It should be noted that the Company has no control over the
timing of realisations of the investments it holds through limited
partnership funds (as most of its investments are). Similarly, the
Company has no control over the timing of the drawdown of its
outstanding commitments, primarily to Dunedin Buyout Fund III, for
new investments. Accordingly, investments through funds will be
made (in the case of funds still in the active investment phase)
and realised in the ordinary course during the life of the relevant
fund. Continuing to hold its interests in a fund over the life of
that fund should enable the Company to benefit from the inherent
value of the fund's underlying investments when they are realised.
However, the Directors may seek to sell all or part of the
Company's interests in a fund, together with any associated
uncalled commitment, prior to the end of the fund's life if they
believe that this may achieve a better balance between maximising
the value of the Company's investment in the fund and progressively
returning cash to Shareholders and is in the best interests of
Shareholders as a whole.
Being prescriptive on the timeframe for realising the Company's
direct investments could prove detrimental to the value achieved on
realisation. Therefore, the strategy for the realisation of the
Company's direct investments will need to be flexible and may need
to be altered to reflect changes in the circumstances of a
particular investment or in the prevailing market conditions. In
seeking to realise the Company's direct investments in an orderly
manner, the Directors will aim to achieve a balance between
maximising their value and progressively returning cash to
Shareholders.
Once all, or substantially all, of the Company's investments
have been realised and outstanding commitments to remaining funds
have been extinguished, the Company will seek Shareholders'
approval for it to be placed into voluntary liquidation.
Returning Cash to Shareholders During the Realisation Period
The Company intends to maintain its investment trust status
until such time as the Company is placed into voluntary
liquidation, including making dividend payments in order to
maintain such status.
The quantum and timing of returns of capital to Shareholders
following receipt by the Company of the net proceeds of
realisations of investments (whether held through funds or
directly) will be dependent on the Company's liabilities (including
any outstanding bank borrowings), its uncalled fund commitments and
general working capital requirements. In particular, the net cash
proceeds from realisations of investments, after settlement of and
provision for liabilities of the Company, will be applied to the
repayment of the Company's outstanding bank borrowings (if any)
prior to returning capital to Shareholders.
As can be seen from the following table, the Company's portfolio
principally comprises funds at different stages in their investment
cycles, although they can be split broadly into two categories:
those funds that are still in their investment phase (when the
focus is on making new investments, although some existing
investments may also be realised) and those funds that are solely
in their realisation phase.
Portfolio Composition as at 31 March 2016(1)
Value % of Portfolio Outstanding Commitment End of Investment End of
Investment (GBPm) (%) (GBPm) Period Life of Fund(2)
Direct 9.3 9 N/a Expired N/a
Dunedin-managed funds
Dunedin Buyout Fund I 0.3 - 0.2 Expired Dec-16
Dunedin Buyout Fund II 41.2 42 7.7 Expired Sep-16
Dunedin Buyout Fund III 25.9 26 27.8 Nov-17 Nov-22
Equity Harvest Fund 4.9 5 - Expired Dec-16
Third party-managed funds
Innova/5 7.8 8 3.5 Dec-16 Nov-19
Realza Capital 9.7 10 0.9 Expired Sep-18
-------------------------- ------- -------------- ---------------------- ----------------- ----------------
Notes: (1) Based on 31 December 2015 valuations and adjusted for
subsequent realisations and investments. (2) With the requisite
approvals from the limited partners, the life may be extended.
Where a fund is still in its investment phase, it can continue
to draw down outstanding commitments to fund new investments,
follow-on investments in existing investee companies and the fund's
costs and expenses. A fund whose investment period has expired
cannot draw down any of the outstanding commitment to make new
investments and, accordingly, an outstanding commitment (if any) to
that fund is less likely to be drawn down in its entirety. It is
expected that, of the Company's total outstanding commitments to
funds of GBP40.1 million at 31 March 2016, around GBP21 million of
the total is likely to be drawn over the remaining life of the
funds.
At 31 March 2016, the Company had an undrawn bank facility of
GBP20 million, which expires on 31 May 2018, and cash balances of
GBP4.6 million. GBP3.3 million of this cash will be used to fund
the interim dividend of 16p per Share for the year ending 31
December 2016, which will be paid on 18 May 2016 to Shareholders on
the register at the close of business on 29 April 2016.
Accordingly, the Company does not have any surplus capital to
return to Shareholders at present.
Due to the illiquid nature of private equity investments, it is
very difficult to provide any certainty on the timeframe for
realisation of the Company's investments or, taking into account
the Company's outstanding commitments to funds, returning surplus
capital to Shareholders. As previously mentioned, the Board will
review, on a regular basis, the strategy for realising the
Company's investments with the objective of achieving an
appropriate balance between maximising value for Shareholders and
the timeframe for returning capital to Shareholders. In view of the
life of Dunedin Buyout Fund III and absent of any earlier sale of
the Company's interest in (and any outstanding commitment to) that
fund, the Directors anticipate that it may take at least seven
years to complete the managed wind-down of the Company. Of course,
the Directors will seek to return in a timely manner to
Shareholders surplus capital resulting from realisations during the
realisation process.
If Shareholders approve the proposed changes to the Company's
investment objective and policy at the General Meeting, the
proposals for returning cash outlined in this section will replace
the Company's current distribution policy, which was adopted in
November 2011 and envisaged that the Company would be making new
investments.
Definitions
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The words and expressions listed below have the meanings set out
opposite them throughout this announcement except where the context
otherwise requires:
"Board" the board of directors of the Company (or any duly authorised committee thereof) from time
to time
"Company" Dunedin Enterprise Investment Trust PLC
"Directors" the directors of the Company from time to time
"discount" in the context of a Share, the amount by which its share price is lower than its estimated
NAV (expressed as a percentage of the NAV per Share)
"Dunedin" Dunedin LLP, the Company's manager
"General Meeting" the general meeting of the Company convened for Wednesday, 11 May 2016 (or any adjournment
of that meeting)
"Listing Rules" the listing rules made by the UK Listing Authority under Part VI of the Financial Services
and Markets Act 2000
"London Stock Exchange" London Stock Exchange plc's market for listed securities
"NAV" in relation to the Company, the value of the net assets of the Company (calculated in
accordance
with the Company's normal accounting policies) or, in relation to a Share, the value of
such
net assets divided by the number of Shares in issue on the relevant date of calculation
"Proposals" the proposed changes to the Company's investment objective and policy, details of which are
set out in this announcement
"Shareholders" holders of Shares
"Shares" ordinary shares of 25p each in the capital of the Company
"UK Listing Authority" the Financial Services Authority acting in its capacity as the competent authority for
listing
pursuant to Part VI of the Financial Services and Markets Act 2000
Note
Cantor Fitzgerald Europe, which is authorised and regulated in
the United Kingdom by the Financial Conduct Authority, is acting
solely as financial adviser for the Company and for no one else,
including any recipient of this announcement, in connection with
the Proposals and other matters referred to in this announcement
and will not be responsible to anyone other than the Company for
providing the protections afforded to clients of Cantor Fitzgerald
Europe or for affording advice in relation to the Proposals or any
other matter referred to in this announcement. Nothing in this
paragraph shall serve to exclude or limit any responsibilities that
Cantor Fitzgerald Europe may have under the Financial Services and
Markets Act 2000 or the regulatory regime established under that
Act.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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