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Response to Electra Private Equity plc

26 Oct 2015 10:00

RNS Number : 3939D
Sherborne Investors (Guernsey)B Ltd
26 October 2015
 

Sherborne Investors (Guernsey) B Limited

26 October 2015

 

Sherborne Investors (Guernsey) B Limited

Response to Electra Private Equity plc

 

 

Sherborne Investors has carefully considered the claims of inaccuracy raised in the Electra board's letter of 21 October 2015 (the "Letter"). The directors' factual assertions in the Letter are directly contradictory to the written record or to publicly available data.

 

We asked to meet the chairman and senior independent director, before their Letter was published, to listen to their assertions and to respond to them privately. They have refused a meeting and, therefore, in the interests of transparency, Sherborne Investors has now released publicly the following documents at www.sherborneinvestorsguernseyb.com:

 

· Written correspondence between Electra and Sherborne Investors

 

· Sherborne Investors' contemporaneous meeting notes with Electra directors

 

· Example of the Chairman's threatening letters to Electra shareholders

 

· Written confirmation that Sherborne Investors did not breach FSMA 2000 rules, while Electra itself appears to have been in breach for at least 7 years

 

 

Highlights

· The board of Electra is not independent of the investment manager which has effectively vetoed the board appointments of Messrs. Brindle and Bramson

The board's lack of independence contributed, in one case alone, to fee practices, first raised by Sherborne Investors in 2014, which have cost shareholders an estimated £151 million, or 13% of their NAV since 2007 (see Exhibit 1).

 

· Electra's NAV underperformed for the 7 year period prior to Sherborne Investors' share purchases and has only outperformed since

Electra calculates its NAV using its own estimates of future earnings. Peers such as 3i and HgCapital use actual most recent earnings (see Exhibit 2). This provides Electra with vastly greater discretion than its peers in calculating NAV. We hope that this discretion is being used judiciously.

 

· The board's Letter inadvertently confirms that Electra's ungeared portfolio performance is, in fact, "plodding"

The board's calculation of gearing misleadingly excludes 49% of portfolio company borrowings and 100% of Electra's own borrowings (see Exhibit 3). Accordingly, actual borrowing levels must be at least twice the level stated and operating performance of the portfolio must be proportionately lower.

 

· The board's Letter indicates that the directors seem to be oblivious to the increasing level of portfolio risk and corporate financial risk

Sector concentration and vintage concentration have increased by 69% and 85%, respectively, over the last 5 years (see Exhibit 4).

 

· Sherborne Investors has pointed out inconsistent and misleading financial disclosures which the board of Electra has not denied, corrected, or explained

The latest misleading disclosure of Electra's gearing is evidence of the board's lack of appropriate policies regarding financial disclosure. This demonstrable lack of independent oversight of disclosures is a fundamental concern for all shareholders.

 

Edward Bramson, a partner in Sherborne Investors, said:

 

"The unkind characterisations in the board's letter do not change the fact that Electra would benefit from more openness to new ways of increasing shareholder value, to improving oversight and governance, and to a more transparent approach to disclosure.

 

"The hostile reactions of the investment manager and the board continue to seem disproportionate to a proposal by a long-term shareholder to nominate a minority of qualified directors to Electra's board who would work collaboratively and constructively with the board and with Electra Partners.

 

"We continue to hope that the directors will reconsider their unwarranted opposition to our nominees."

 

 

Letter to Shareholders

 

Dear Fellow Shareholder,

 

This letter is in response to the letter from Electra's board dated 21 October 2015 (the "Letter"). Issues that are simply differences of opinion have been ignored as shareholders are free to make their own assessment of them. Where the board's factual misstatements seem significant, we address them below.

 

 

Board's lack of independence from the investment manager

 

Electra Partners may or may not nominate directors to the board, but we believe they have certainly vetoed the appointments of Mr. Brindle and Mr. Bramson and perhaps others of whom we are unaware. The board's lack of independence enabled a fee practice that since 2007 has cost shareholders an estimated £151 million, or 13% of Electra's NAV (see Exhibit 1). This practice and others are clear indications that the board is effectively dependent on Electra Partners and in our view negates the fundamental oversight function of the board.

 

NAV valuation policy and accelerated release of financial report

 

As shown in Exhibit 5, Electra's NAV growth underperformed the FTSE 250 index for 7 years prior to the commencement of Sherborne Investors' purchases and has outperformed since our purchases began.

 

The board has stated that "Sherborne as a shareholder of Electra has, of course, no influence over NAV performance." However, the coincidence of outperformance after we became shareholders is intriguing.

 

Electra's valuation policy allows Electra Partners to use its own estimates of the next 12 months' earnings of its portfolio companies to calculate NAV. Electra's major peers, 3i and HgCapital, use the most recent actual earnings of their portfolio companies to calculate NAV (see Exhibit 2). Therefore, Electra has vastly greater discretion in setting NAV. The company does not disclose its estimates for the coming year or for any prior period, so we can only hope that this discretion is being used appropriately in the context of the shareholder meeting that is set for 5 November.

 

The board has accelerated the release of its 30 September financial report by an entire month compared to its normal schedule. We note that it is faster to compile financial statements from estimates than from audited historical data. In our analysis of Electra, we have relied principally on audited financial statements of the portfolio companies that we have obtained, as these data are independently verifiable.

 

Underperforming ungeared portfolio performance offers opportunity to improve shareholder value

 

Sherborne Investors has deconstructed Electra's NAV growth as shown in Exhibit 6. This shows clearly that with equivalent financial gearing Electra materially underperforms the FTSE 250 index.

 

In order to avoid accepting this conclusion, the board's Letter contains, on page 4, the following misleading statement:

 

"Sherborne has suggested that Electra is reliant on gearing beyond index levels to generate returns, however as at 30 September 2015, the Electra portfolio's gearing was at similar levels to the FTSE 250's net debt/EBITDA4."

 

The related footnote 4 says:

 

"The Electra portfolio gearing referred to includes all direct unlisted investments over £5 million with the exception of CALA, Promontoria, PINE, Sentinel and Park Resorts."[i]

 

Although Electra does not itself disclose the debt of Park Resorts, the audited financial statements of Park Resorts as at 31 December 2014 indicate that the board's statement excludes 49% of the portfolio's borrowings.[ii] The statement also excludes 100% of Electra's own borrowings. Accordingly, by the board's own calculations, Electra's consolidated gearing is more than twice that of the FTSE 250.

 

With this extremely misleading financial disclosure the board has, perhaps inadvertently, made the case that Electra's returns are in fact largely the result of gearing and that a review of operating performance is warranted as Sherborne Investors has consistently stated.

 

We have pointed this out to the board both privately and publicly, not as a criticism of Electra Partners, but as evidence to the board of an opportunity to improve shareholder value that is currently being overlooked.

 

Incomplete and misleading financial disclosures

 

The disclosure taken from the board's Letter is a particularly aggravated example of a disclosure designed to cast Electra's performance in a favourable light rather than to arrive at a sound conclusion.

 

In Exhibits 7 and 8 we identify similarly misleading disclosures previously provided to the board which it has not denied, corrected, or explained.

 

We continue to believe that impartial consideration of what the actual data show would lead the directors to conclude that there is a need for improved policies and procedures to oversee financial disclosures. We also hope that the board will be open to reconsidering the need for a review based on more accurate financial data.

 

 

Portfolio and corporate financial risk

 

Shareholders should be concerned by the board's statement on page 3 of its Letter that:

 

"the portfolio assets remain diversified by vintage and sector."

 

In fact, as set out in Exhibit 4, vintage and sector concentration have increased by 69% and 85%, respectively, over the past 5 years.

 

The board's Letter also states that:

 

"[Sherborne Investors] appears to misunderstand the difference between an available facility…and drawn debt."

 

It is safe to assume that we do, in fact, understand the difference between drawn and committed borrowing facilities. Given the potential riskiness of Electra's capital structure, we strongly suggest that the time to establish risk controls is before debt is drawn rather than after, when it is too late to control the risk.

 

We sincerely believe that the addition of our nominees would expand the board's capability to measure and control risks while not imposing unreasonably on the flexibility of the investment manager.

 

 

Claimed inaccuracies in Sherborne Investors' letter of 16 October 2015

 

The board's claims of inaccuracy depend in large part on the characterisation of materials that Electra has in its possession and shareholders do not. It seems careless for the board to risk exploiting its information advantage when Sherborne Investors can expose these materials by making them public, which we have now done at www.sherborneinvestorsguernseyb.com. Inter alia, the information supporting statements by Sherborne Investors is as follows:

 

· Threatening letters from Roger Yates to Electra shareholders

 

"We reserve our right to discuss the circumstances of the relevant dealings with relevant regulators, should we deem it appropriate." (Roger Yates letter to selected Electra shareholders, 5 June 2014)

 

· Attempt to compel divestiture of Sherborne Investors' shareholding in Electra

 

"The FCA has responded that, as it has no record of Electra Private Equity Plc as a controller of the Premier entities, it needs further information to understand why the Sherborne entities are controllers." (Correspondence from Sherborne Investors' solicitors, 16 June 2014)

 

· Invitation to make a proposal to manage Electra's assets

 

"the Board would be prepared to consider separate proposals from [Electra Partners] and [Sherborne Investors] to manage Electra's assets." (Roger Yates letter to Sherborne Investors, 30 April 2015)

 

Mr. Yates has also asserted that he did not make statements about the effect of the investment management contract on board representation for Sherborne Investors or about such representation being a "Red Line." We can only say that Mr. Yates' recollections differ from those of Mr. Bramson and Mr. Welker of Sherborne Investors.

 

Conclusion

 

During the course of our engagement with the board and Electra Partners we have encountered an unfortunate attitude that no one from outside of their existing circle could offer any worthwhile suggestions for improvement. We believe that that board has over-reacted to our request for a minority of board seats and has misinterpreted our suggestions as criticisms. We believe that the addition of our nominees would open up the board to a wider range of experiences and that in fact working relations with the board and the investment manager would prove to be positive.

 

The "new approach" that we propose is simply for the board as a whole to evaluate information on its merits, rather than on preconceptions, and to act on the information to maximise long-term value for all shareholders.

 

We respectfully ask you to vote IN FAVOUR OF all of the resolutions.

 

Yours faithfully,

 

Sherborne Investors

 

 

"Sherborne Investors" refers to the investment manager of SIGB, LP, Sherborne Investors Management (Guernsey) LLC.

 

"NAV" refers to diluted net asset value or diluted net asset value per share, as appropriate

 

"Electra" refers to Electra Private Equity plc

 

"Electra Partners" refers to Electra Partners LLP, the investment manager of Electra

 

HOW TO VOTE

 

By now you should have received a notice of general meeting of Electra ("GM") to be held at 11.00a.m. (London time) on Thursday 5 November 2015 at Allen & Overy LLP, One Bishops Square, London E1 6AD ("Notice of GM").

 

By Post

 

You will find enclosed with the Notice of GM, a form of proxy for use at the GM ("Form of Proxy"). Whether or not you intend to attend the GM, Sherborne would urge you to complete the Form of Proxy to vote IN FAVOUR OF all of the resolutions and to appoint Edward Bramson as your proxy for the GM.

 

The Form of Proxy must be completed and signed and sent or delivered, together with any power of attorney or other authority (if any) under which it is signed, so as to reach Electra's registrars, Equiniti Limited, at Aspect House, Spencer Road, Lancing, BN99 6DA, United Kingdom as soon as possible but in any event no later than 11.00 a.m. (London time) on Tuesday 3 November 2015. The return of the completed Form of Proxy will not prevent you from attending the GM and voting in person if you wish to do so.

 

Via CREST

 

CREST members may also appoint a proxy or proxies through the CREST electronic proxy appointment service by utilising the procedures described in the CREST Manual. CREST Personal Members or other CREST Sponsored Members, and those CREST members who have appointed (a) voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.

 

If you need assistance voting your shares or have any related questions, please contact Sherborne Investors' proxy solicitor, D.F. King & Co., Inc.:

 

European Investors

Direct: +44 (0)20 7920 9700

 

US Investors

Toll Free: +1 (800) 821-8781

Direct: +1 (212) 269-5550

 

Email: electra@dfking.com

OTHER INFORMATION

 

If you are in any doubt about the action you should take, you are recommended to seek your own independent financial advice immediately from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser duly authorised under the Financial Services and Markets Act 2000, as amended, if you are resident in the United Kingdom or, if not, from another appropriately authorised independent financial adviser.

 

The contents of this document should not be construed as legal, investment or tax advice, nor should it be construed as an invitation to purchase or sell any of your shares in Electra. This document is being circulated to shareholders of Electra by Sherborne Investors for the purpose of supporting resolutions proposed by Pershing Nominees Limited (for and on behalf of Sherborne Investors) as a member of Electra pursuant to section 303(2)(a) of the Companies Act 2006.

 

Sherborne Investors believes that certain statements in this document may constitute "forward-looking statements". Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and risks, many of which are subject to change. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of Sherborne Investors. Additionally, forward-looking statements speak only as of the date they are made and Sherborne Investors undertakes no obligation to release publicly the results of any future revisions or updates it may make to forward-looking statements to reflect new information or circumstances after the date of this document or to reflect the occurrence of future events.

 

-Ends-

 

Enquiries: 

 

FTI Consulting +44 (0)20 3727 1000

Jonathon Brill

Oliver Winters

Adam Cubbage

 

Numis Securities Limited (Broker) +44 (0)20 7260 1275

David Benda

 

Sherborne Investors (Guernsey) B Limited +44 (0)14 8171 3843

Talmai Morgan (Chairman)

Gillian Newton (Administrator)

 

[i] Emphasis added by Sherborne Investors

[ii] See Exhibit 3 for details

This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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