Shareholders in Gabelli Value Plus+ (GVP) continue to hold out hope for a solution on the future of the trust, after criticising its majority shareholder Associated Capital Group (ACG) for frustrating their wishes by blocking a proposed liquidation vote.
The situation was described as "rather a mess" by analysts at Stifel, while head of investment company research at QuotedData James Carthew said it was "one of the more outrageous moves we have seen in the investment company sector for some time".
Numis accused ACG of "seek[ing] to frustrate the board's plans", but CG Asset Management's Peter Spiller, whose clients hold around 3% of shares, told Investment Week he hoped ACG would eventually relent and "vote to co-operate with the board".
GVP has been under fire for over a year now, since its second-largest shareholder Investec Wealth & Investment (IWI) wrote an open letter, criticising the trust's board for "not acting proactively on behalf of shareholders" and calling for an early continuation vote.
IWI's criticism was wide-ranging, focusing on poor performance since its 2015 IPO as well as high management fees. It sought justification for the merger arbitrage element of the portfolio and clarification on the value add from small-tail positions.
Spiller said the trust had "what can only be described as a dire record". GVP has returned just 16.2% since its February 2015 IPO, underperforming its IT North America sector peers' average of 74.9%. It has even lagged the Russell 3000 Value index, which is up 45.7% in that time. In the three years to 23 September GVP has lost 6.3% compared to a gain of 8% for the Russell 3000 Value index.
The episode came to a head recently, when it was revealed ACG was seeking to block proposals from the board for a liquidation vote, after two-thirds of shareholders voted against continuation at its July AGM.
After the continuation vote overwhelmingly failed, the board had been required to submit proposals to wind-up, reorganise or reconstruct the company; after consulting investors, it recommended voluntary liquidation.
However, on 15 September ACG, which owns more than 27% of GVP's share capital, said it would vote against liquidation after convening an independent subcommittee of its board to evaluate the proposal. With 75% or more of the shareholder base needing to vote for liquidation for the proposal to be passed, GVP's board did not put the proposals forward, but served 24 months' protective notice on investment manager Gabelli Funds.
"The board will continue to evaluate the options available to the company. A further announcement will be made as soon as practicable," it said.
Shareholders and analysts alike turned their ire on ACG, which was spun out of GAMCO Investors, the parent company of Gabelli Funds, in 2015, with GAMCO's chair and CEO Mario Gabelli acting as executive chairman of ACG as well as a senior portfolio manager responsible for the discretionary management of GVP.
"Unsurprisingly, apart from Associated Capital, everybody wants to bring this to an end, get their money back and do something better with it," Spiller said, claiming it was a "very naked [attempt] to try and protect management fees", a charge levied by brokers, too.
"The board served notice on the investment manager in July but the notice period was two years - so whatever happens, the manager will earn a decent fee," said Carthew.
Numis's Priyesh Parmar reasoned that while management groups will never be happy with the winding up of their mandate, "we generally do not see them seek to frustrate the board's plans".
"This may see Gabelli retain the assets for the length of the two-year notice period, but we would expect the impact will be to damage its reputation with UK investors, especially with a number of large wealth management groups that are direct investors in the Gabelli Value Plus+," Parmar continued.
"As a result, we remain surprised at Gabelli/Associated Capital's approach, particularly given the size of the fund [£115m] versus GAMCO AM/Gabelli Funds AUM of $29.4bn at 30 June."
That said, JP Morgan Cazenove's Christopher Brown, who said ACG was "acting against the interests of everybody but itself", believes the fact Gabelli has been served notice means "there is no additional upside in terms of fees, other than those from a recovery in the NAV".
ACG did put forward some suggestions aimed at enhancing value for shareholders, including share buybacks, establishing annual distribution targets, reducing fees and the introduction of the use of leverage.
However, these seem no less palatable for most, with Brown calling them "a total non-starter". Spiller, meanwhile, said: "The truth is that if you have a management process which so far has produced a negative result against the index, there is no fee low enough to make it worth continuing."
Stifel analysts Anthony Stern and Iain Scouller suggested the assets within the trust could be distributed "in specie" to Gabelli and ACG, which "would mean they could retain their exposure to these companies, while the majority of shareholders who want a cash exit could then receive it".
Brown agreed, adding "it is not [ACG's] job to tell other shareholders that they are better off holding on".
Carthew estimated 96% of GVP's capital was distributable, noting that returning that to shareholders via a dividend payment "would require approval of a simple majority of investors". "The distribution might be taxable in certain circumstances but it looks like a simple solution to us."
Parmar noted that had previously been tried by Electra Private Equity, but recalled "this was unpopular with many investors given its tax inefficiency".
Another, more complex solution could be to split the company into an ongoing share class and a liquidation share class, allowing ACG to stay invested that way.
Brown concluded an on-market tender looks like the best option. While it is generally considered good governance to seek 75% majority approval for this, Brown said he understood only 50% was required by law.
"Perhaps the issue with this is that it would leave ACG as a controlling shareholder, and therefore in theory forced to make a bid, but it is likely that the [takeover] panel would waive this requirement under the circumstances, and in any event that would be ACG's problem."
Spiller, though, said he hoped ACG would see sense and eventually vote in favour of liquidation. Other shareholders Investment Week spoke to held the same hope.
"For a house which does pay lip service to ESG, it is very disappointing they have gone down the route they have," Spiller said. "If [the subcommittee is] truly independent, they will certainly vote to co-operate with the board."
"I am pretty comfortable that [GVP] will be liquidated, but whatever happens I am pretty sure Gabelli will not be running the money going forward. If [ACG] come to appreciate that, then their motivation might change."