We might get a Xmas in July thanks to Harvest Lane!Consolidation...

We might get a Xmas in July thanks to Harvest Lane!

Consolidation in the LIC sector continues.

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From AFR Street Talk today:

Gloves off! Ellerston’s last-standing LIC targeted by M&A arb fund

Gather around, there’s a new fund manager fight in town!

Sydney-based hedge fund Harvest Lane Asset Management has gone hostile at ASX-listed Morphic Ethical Equities – which is managed by Ellerston Capital’s Bill Pridham and trades at a big discount to underlying value while undershooting benchmark returns.

A letter it fired off after market close on Wednesday to Morphic Ethical’s board and key shareholders detailed its recent attempts to get Ellerston to fix three key problems.

The traded share price is usually about 15 per cent lower than the underlying asset value, portfolio returns have been poor (3.73 per cent lower than index since inception), and Morphic Ethical has tried to placate shareholders with a half-hearted buyback, the letter said. MEC announced the buyback – its first ever despite the persistent discount – shortly after Harvest Lane popped up above the 5 per cent mark.“Our concerns have solidified following a recent informal discussion between myself and [Morphic Ethical] chairman Jack Lowenstein, indicating to us the board does not take the current discount to NTA seriously,” the letter reads.

Signed by Harvest Lane’s chief investment officer, Luke Cummings, the letter demanded Ellerston Capital convert Morphic Ethical to an unlisted fund – in line with what it did at Ellerston Global Investments in 2019 and Ellerston Asian Investments Limited. It also wants the board to suspend the dividend reinvestment plan, and sharpen the buyback by lifting discount hurdle target from (negative) 15 per cent to zero.

The Geoff Wilson playbook

Harvest Lane owns 5.95 per of Morphic Ethical and has sat quietly since 2019 – around the same time that Morphic’s founders Jack Lowenstein and Chad Slater handed over the management to Ellerston. (Bill Pridham has been running the portfolio, while Lowenstein is the chairman).

It has given Morphic Ethical’s board until July 7 to cough up a solution, indicating it has built support from shareholders for “any action [it] might take to help address the current situation”.

To Street Talk, that last bit sounds like Harvest Lane’s threatening to attempt to roll Ellerston off Morphic Ethical’s management and board; hypothetically it could do that by calling an extraordinary general meeting. But that would be a measure of last resort.

It’s clear as day the immediate upside in the situation is for Morphic Ethical’s investors to get an instant 15 per cent uplift if the listed fund is converted to an unlisted vehicle which would enable redemptions at underlying value. Cummings, usually spotted around mid-cap deals, looks like he’s taking cues from master wranglers like Geoff Wilson, David Kingston and Fred Woollard.

It’s a prickly letter that should have the phones running hot in Ellerston’s office come Wednesday morning. Neither Ellerston nor Harvest Lane could be contacted on Wednesday evening.