A year ago, the sometimes sleepy world of UK investment trusts – companies that invest in other companies – had a moment of genuine drama. A loud New York raider, Boaz Weinstein of hedge fund Saba Capital, bought significant stakes in seven trusts and lobbed insults at their boards, generally about poor investment performance or a failure to close the gap between the value of the assets and the share price.
For all the fireworks, the campaign was a flop. Saba filed a variety of shake-’em-up motions at what it called the “Miserable Seven” and lost the lot. A 7-0 defeat, you’d think, would prompt Weinstein to slink away in embarrassment but, as quickly became clear, that’s not his style.
Thus Edinburgh Worldwide – a trust famous for its big holding in Elon Musk’s SpaceX – found itself under the spotlight again in January when Saba forced a vote to install three nominees on the board. It lost that one too: 94% of non-Saba votes backed the existing board and strategy. But, because Saba owns 30% of the stock, its actual margin of defeat was narrower at 53% to 47%, which is too close for comfort from the point of view of the defending board.
Sure enough, Saba returned three weeks later for yet another pop, presumably in the hope or expectation that one more heave would get it across the line. It tabled a motion, set to be voted on next month, to appoint the same three nominees who had just been rejected.
Cue Edinburgh’s response on Tuesday, which was a mix of the imaginative and the desperate: it will offer to blow itself up, in effect, via a 100% tender for its own shares. Shareholders will be able cash out at close to the value of the assets with the wrinkle that the SpaceX holding, which is 16.6% of the portfolio, will be retained until a “crystallisation event” happens, a reference to Musk’s plan to list the rocket firm this summer.
The imaginative element is that the plan could stymie Saba’s back-door attempt to take control. The majority of Edinburgh’s shareholders clearly don’t want what Weinstein is selling, namely a change of investment manager (with Saba itself the likely replacement) and a new investment strategy. So those investors should be able to exit if they wish rather than be stuck inside a Saba-controlled vehicle – and they can still get the likely upside in the SpaceX holding.
But the desperate part is that such radical measures are needed at all. Jonathan Simpson-Dent, the trust’s chair, didn’t hold back. “We have reached the end of the road with Saba’s obsession to break the status quo and its continuing disregard for the expressed wishes of other shareholders,” he said, bemoaning the costs of dealing with the raider’s “repeat smash and grab cycle”.
He’s absolutely right. The Financial Conduct Authority’s rules aren’t designed to deal with aggressively belligerent actors that won’t take no for answer. Activist investors obviously have their uses – they are a protection against bad and lazy boards – but Saba’s tactics come from a different playbook. The hedge fund was attempting to gain control by grinding away ceaselessly and offered little real scrutiny of its nominees.
The FCA has promised a review, which will conclude too late for Edinburgh’s purposes. But the regulator still needs to get this right. The listing rules give regular trading companies protections against perpetual sieges by failed bidders. Investment trusts deserve something similar.
