09 January 2019

Pengana 'alignment shares' to entice investors into $1b trust

(Jonathan Shapiro, Australian Financial Review)

Pengana Capital, the publicly listed asset manager, says it has found a way to align the interests of shareholders and investors in its proposed global private equity fund, which could raise up to $1 billion. 

The fund manager, which has a market capitalisation of $225 million, will issue "alignment shares" to investors in the Pengana Private Equity Trust, the forthcoming initial public offering of its global private equity fund.

The share issue will effectively give investors in the fund a 5 per cent reward to participate in the offer, but a large fund raising should in turn boost the sharemarket value of the management company.

"The successful launch of this fund is very accretive for shareholders within Pengana and we are sharing some of that value creation with those that show their faith in backing the offer," Pengana chief executive Russel Pillemer told The Australian Financial Review.

The alignment share structure marks a new development in the listed funds space that Mr Pillemer hopes will be a "win win" for both shareholders in the Pengana management company and fund investors.

On Monday, Pengana revealed the structure when it announced it will hold an extraordinary general meeting at the end of the month to seek approval from shareholders to create the alignment shares.

The value of the shares issued will be the equivalent of 5 per cent of the proceeds raised, which could be up to $50 million if the fund raises $1 billion, the regulatory filing said.

The shares will be issued to the newly formed Pengana Private Equity Trust, which will invest in global private equity funds and assets via Chicago-based firm Grosvenor Capital Management.

Those shares, which will be equivalent to ordinary shares in Pengana Capital, will be distributed to holders of the investment trust after two years.

The alignment shares will dilute existing shareholders but the logic behind the mechanism is that the funds raised will generate management and performance fees and therefore increase the value of the company, benefiting ordinary and "alignment" shareholders.

Mr Pillemer said the private equity fund would tap demand from investors to gain exposure to an asset class that has been difficult for individual investors to access, but has historically offered better returns with less volatility than listed shares.

The share issue is equivalent to a 5 per cent uplift for investors that subscribe to the trust offer and is designed to "make it easy" for prospective investors.

"We are not doing this because there are concerns about demand. There is a huge amount of demand," Mr Pillemer said.

He said the structure was the latest step towards valuing the capital that investors provided to fund managers in a closed-end format.

"There was a lack of recognition as to how valuable these vehicles are. A few years ago [fund managers] didn't even pay the cost of the offer."

Before 2017, initial investors in listed investment companies would wear the cost of the fund raising, which would become apparent in the reduction of the net asset value on the first day of trading.

But a $600 million raising by VGI Partners set a new precedent as the fund manager covered the upfront cost of the raising.

"The standard is that you invest $1, and you get a $1. Now we are flipping it on its head."

Mr Pillemer said funds management giant Magellan was the first notable example of investment firms rewarding investors that provided them with permanent capital in a closed-end fund when it raised $1.5 billion via its Magellan Global Trust offering.

That raising coincided with the VGI offer in the second half of 2017 but existing Magellan fund investors were given an additional 6.25 per cent of their subscription in the form of "loyalty units".

Mr Pillemer said the Pengana offer was different because the effective incentive was available to all investors and there was no prescribed holding period to receive the discount as the alignment shares were held in the trust.

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