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Hedge fund rebels aim to oust Strategic Equity Capital bosses

Date: Friday, July 31, 2009
Author: Elena Moya, Guardian

Fortelus says SVG-managed trust is underperforming
SEC argues that plan to by 3i fund offers good value
Hedge fund Fortelus and other investors are preparing to oust the management of a publicly listed investment trust because they disagree with its investment decisions, the Guardian has learned. The growing row provides a rare insight into the way hedge funds operate.

Fortelus owns 14% of the shares of Strategic Equity Capital (SEC), a trust managed by London-based asset manager SVG Investment Managers. Along with shareholders representing another 20% of the company's capital, the rebel group will request management to step down at an extraordinary general meeting to be held in London on 14 August. "We're launching an EGM to remove the board of this underperforming fund," said one of the investors.

SEC manages about 28m in assets, mostly in UK equities. It plans to buy a stake in another fund, run by private equity firm 3i, using its own shares, which trade at a 26% discount to the trust's value. Using the heavily discounted stock to buy a portfolio that includes similar assets is dilutive, the investors argue.

The EGM has been called by the trust, which needs the approval of investors to carry on with the deal. Under the proposed transaction, SEC would issue 7.2m shares, worth about 3.69m, apart from providing another 5m for the new fund's investments, the investors say.

"We have the support of the majority of shareholders, although a small minority don't think it's a good idea," said Adam Steiner, head of research at SVG, which manages the fund, and also holds an approximately 20% stake. "It provides good value and the portfolio that we're buying trades at a 50% discount [to asset value]."

The investors, who reject this valuation, say that they're also opposed to a company practice that doesn't let them withdraw their funds until November next year. The fund's management argues that withdrawals depend on its performance.

Both sides claim to have the majority of shareholders' support.

Activist hedge funds buy equity or debt of companies to spur changes, such as mergers, a change in management, or sale of assets, as a way of creating value.

Hedge funds, which have been criticised for being opaque, are facing tougher regulation from a European directive aimed at bringing more transparency into the sector. Fortelus's website only gives the fund's address in Mayfair, London.SEC has been listed on the London Stock Exchange since 2005 after raising 70.4m. The fund invests in undervalued companies that "would benefit from strategic, operational management initiatives," SEC says on its website.

The fund's industry advisory panel includes Stewart Binnie, former partner of, and consultant to, Schroder Ventures (now known as Permira), Sir Clive Thompson (former chief executive and chairman of Rentokil), Ken Minton (former chief executive of Laporte), William Nabarro (former vice-chairman of KPMG Corporate Finance) and Alan McKay (senior partner at 3i), according it its website.