- Discount to net asset value remains an issue
- Board dismisses option of limited ‘exit opportunity’
- Managed wind-down ‘a sensible option’ says analyst
Investment company VPC Specialty Lending (VSL), which specialises in asset-backed lending to growing companies, has surprised the market with a proposal to wind down the business and return capital to shareholders due to its failure to reduce the discount to net asset value, also known as NAV.
The shares initially jumped 7% to 89p as investors rushed to take advantage of the discount, which stood at 17% at last night’s closing price, but had settled back to 84.5p by late morning.
WHY WIND DOWN THE COMPANY?
The board of VPC Specialty Lending says it has ‘for some time been reviewing options for reducing the continuing deep discount of the company's share price to NAV’, including consulting with its major shareholders and taking professional advice.
Under the trust’s wind-up provisions, if the discount to NAV were to stay above 5% in the three months to 31 March next year shareholders would be entitled to vote on a 25% ‘exit opportunity’ at the next annual general meeting.
The company says given the size of the discount it considered proposing the ‘exit opportunity’, but it realised reducing the size of the fund by 25% could have a detrimental impact by making the shares less liquid as well as increasing the overall cost ratio relative to NAV.
Therefore, it has proposed a ‘managed wind-down’ meaning it will ‘endeavour to realise all of the company's investments in a cost-effective manner that achieves a balance between maximising the value received from investments and making timely returns of capital to shareholders’.
GOOD WHILE IT LASTED
According to the Association of Investment Companies, the trust’s NAV as of last night’s close was 100.9p per share compared with a closing price of 83p.
As the company chairman Graeme Proudfoot comments, two of the three performance thresholds set out in 2020 had been met with shareholders enjoying an annualised share price return of 13.8% and an annualized NAV total return of 11.3% together with an attractive dividend which was maintained for four years.
However, the issue of the continuing deep discount to NAV had already prompted one group of shareholders to ask for a general meeting to consider changing the firm’s investment policy and share capital structure.
EXPERT VIEW
The investment trust team at Numis describe a managed wind-down of the trust as ‘a sensible choice given the persistent discount and struggle to attract new demand’.
Despite generating strong returns in recent years, listed debt funds have struggled as risk-free rates have risen on the back of higher interest rates and, as Numis points out, VPC Specialty Lending has struggled to attract new shareholders since the exit of Invesco and Woodford.
The team also cautions that the wind-down is far from straightforward as the trust lends to niche and emerging lending businesses, mostly in fintech, as well as taking equity stakes in the companies it supports.
There is also the non-trivial fact that the manager of VPC Specialty Lending, Victory Park Capital, also manages SVS Opportunity Fund which owns around a 20% stake in the trust, so a managed wind-down may be the least bad option for all concerned.
