Ann: Explanatory Memorandum, page-22

‘Egregious money grab’Cordish Dixon fund merger angers investors

JonathanShapiro and CarrieLaFrenz

Oct 11, 2022 – 5.32pm

Aproposal to merge a series of private equity funds overseen by the formerparent of Dixon Advisory and roll the proceeds into a $650 million unlistedstructure with limited redemption terms has been slammed by investors as a“egregious money grab.”

Detailsof the merger proposal tabled by E&P Investments, the responsible entity offour Cordish Dixon private equity funds that manage a combined $650 million, werepublished late on Friday.

But thatsent the share price of the three ASX-listed Cordish Dixon funds tumbling bybetween 13 and 18 per cent as investors feared efforts to have their fundsreturned intact would be hampered under the arrangement.

The proposalis for the three ASX listed funds with $362 million of assets and a fourth $296million unlisted fund to merge into one of the listed funds, before delistingand converting into an unlisted open Evergreen fund in May next year.

Butinvestors fear the proposal will keep them locked up in the funds for longer asthe new fund will only allow redemptions of up to 5 per cent of assets, everysix months and subject to certain conditions.

Aunitholder vote to wind down the fund can only be held every seven years underthe proposal.

Activistinvestor David Kingston who owns units in the listed funds said the market had given the RE’s proposal and its chairman Stuart Nisbett “a massive thumbs down.”

“Simplesolution Stuart, just hand the investors their money back,” Mr Kingston told TheAustralian Financial Review.

Hedescribed the proposal as “an egregious money grab: cancel the distributions,smash the liquidity, cancel the ASX listing, and use part of the asset sales tocreate a new Evergreen Fund.”

TheCordish Dixon series of funds, which are managed out of the United States werefirst sold to Dixon Advisory investors in August 2012 with the fourth iterationplaced with investors in 2018.

Theirstrong performance has been one of the bright spots of the troubled Evans Dixonempire, which has been plagued by conflicts of interest scandals, lawsuits andclass actions mainly relating to its USResidential Masters Fund, or URF.

EvansDixon was created by the merger of Dixon Advisory and Evans & Partners andlisted in 2018. It has since rebranded as E&P Financial.

Incontrast to the URF, the Cordish Dixon funds assets have delivered double-digitannualised gains. And while the investors have had to accept hefty discounts ofmore than 30 per cent to asset value to trade out of their holdings on the ASX,capital has been gradually returned via asset sales.

Butinvestors are fearful the proposed Evergreen Fund would hamper their ability toaccess capital invested in the fund given its limited liquidity terms.

“Therestructure is tainted by the multiple conflicts of the Evans group, and ofcourse the restructure involves a substantial increase in management fees tothe Evans group,” Mr Kingston said.

MrKingston also noted that the Cordish funds were sitting on $US40 million ofcash proceeds from asset sales that would not be distributed “unless theproposal is voted down.”

Themerger is subject to unitholder votes on November 7. The board of the RE,E&P Investments, has unanimously recommended that unitholders vote infavour of the merger which independent experts Kroll has deemed is fair andreasonable.

But thatreport acknowledged the competing interests of investors among the variousfunds and with varying investment time horizons.

Thatreport said the merged fund could be preferable for some unitholders that wantto maintain their investment rather than being forced to liquidate over timegiven the strong historic returns from private equity, but this, it said, “maynot suit other investors.”

Thereport also said investors would no longer receive cash distributions from themerged fund, but would still be taxed on reinvestment income.

If theyneeded to fund tax payments, they could through the withdrawal mechanism butsaid the requests may be scaled back or insufficient. That is becausewithdrawals are limited to 5 per cent of assets every six months, and subjectto manager discretion.

Finally,the report said the new fund would charge a 1 per cent fee into perpetuity,whereas the existing funds had finite fee structures. But it said the fees werecomparable to other private equity funds.

Aspokesman for E&P referenced the report and said the merger was “consistentwith E&P’s stated strategy of exiting real assets and focusing on coreequities strategies.”

Thespokesman said the fund was overseen by a “majority independent responsibleentity, which together along with its adviser MA Moelis Australia “hasconsidered a range of options to enhance the structure of the CD Private EquityFund series and increase their respective liquidity.”

“Theybelieve this is the best way of achieving these while continuing to provideexisting investors with exposure to the strong performing underlyinginvestments.”

Thepotential complications in withdrawing capital or having it returned is a keysource of discontent among some investors.

RetireeMark Taylor, said he was “very disappointed to hear that E&P/Dixons areagain acting ‘not’ in the best interests of their investors.”

Mr Taylorhad invested in a Cordish Dixon fund for almost ten years, and said he reliedon the capital returns that typically accrue toward the end of the life of aprivate equity fund.

He saidE&P wad proposing to discontinue distributions to self funded retirees thatrelied on them to reinvest in a “new private equity fund with no guarantees onwithdrawal timeframes.”

“Perhaps ASIC’smulti-million dollar fines, the reputational damage and the ongoing class actions are not ringing loud enough”.

A furtherinvestor, who a six figure holding in the ASX listed CD2 was equally distressedby the proposal.

“Thehubris on these guys is unfathomable. E&P doesn’t have a reputation left touphold, but if it did, this would end it.”