Thanks FD I agree with your comments. It is indeed stilla “shite deal”: the announcement of the Merger Proposal Update, long after COBlast night, merely polishes the turd, to use a popular phrase.The proposal is hopelessly conflicted in atleast two fundamental respects: first, there is the conflict between E&P’s outrageousgrab for fees and the interests of investors, as I previously discussed, andsecondly there is a conflict between the holders of CD1 to 3 and holders ofCD4.
Itis extremely difficult to see how even E&P can believe that it is complyingwith the Duties ofresponsible entity (Corporations Act- s 601FC (1)), especially
c) act in the best interests of the members and, if thereis a conflict between the members' interests and its own interests, givepriority to the members' interests; and
(d) treat the members who hold interests of the same classequally and members who hold interests of different classes fairly. (I concede that the funds are not different “classes” butthis states a very good principle which can and should be followed as a moral obligation).
The following table expands on my earlierpost in the same format (with source notes) by including the corresponding cashbalances and transfer for CD4. *I have again used a guestimate exchange rate of0.68, since the transfer dates and exchange rates haven’t been disclosed by theRE
| Cash balances A$m | CD1 | CD2 | CD3 | CD4 | proforma total |
|---|
| 1 | Held at Fund level at 30 June A$mA | 4.6 | 11.0 | 24.7 | 25.5# | |
|---|
| 2 | | | | | | |
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| 3 | Cash held as share of partnership assets A$m equivalent | 8.5 | 22.1 | 28.5 | 41.7 | |
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| 4 | Cash* distributed by partnership to Fund after 30 JuneB | (4.4) | (14.7) | (20.6) | (19.1) | |
|---|
| 5 | Residual share of cash held in USA via p’ship A$m | 4.1 | 7.4 | 7.9 | 22.6 | 42.0 |
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| 6 | | | | | | |
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| 7 | New cash held at Fund level after transfers =A + B | 9.0 | 25.7 | 45.3 | 44.6 | |
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| 8 | Less distribution to unitholders from CD3 after 30 June | n/a | n/a | (17.4) | n/a | |
|---|
| 9 | Net cash at Fund level A$m | 9.0 | 25.7 | 27.9 | 44.6 | 107.2 |
|---|
| 10 | Number of units at 30 June | 36.6m | 52.5m | 72.0m | 117.9m | |
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| 11 | Net cash at Fund level cents per unit | 24.6c | 49.0c | 38.8c | 37.8c |
|
|---|
# Deloitte p59 EM = A$6.7m cash and Kroll 11.4 plus adjustedproforma for the cash call partly offset by distribution ie 117.9 m units x(32c call – 16 c distribution) = A$18.86m, thus A$25.5m total [see note 1 atbottom of P59 and per below…]
“CD Private EquityFund IV 30 June 2022 Distribution and Capital Call As both the distribution and capital call will occur at the sametime, the capital call of $0.32 per partly paid unit will be offset by theDistribution. Therefore, the payment required by unitholders to meet the fifthand final capital call will be reduced to $0.16 per unit. …with payment forthis fifth call due by Tuesday 2 August 2022…... Followingcompletion of the fifth and final capital call, units will be fully paidat $1.60, and the Responsible Entity is consideringoptions to enhance the liquidity of the Fund. The Responsible Entitywill provide updates in this regard when it is appropriate to do so.”
Kroll11.4 shows Fund 4’s share of partnership assets in USA/ Caymans at 30 June A$269m includedA$41.7m cash.From this, US$13m cash waspaid by the LP to Fund 4 after 30 June, per part5.7. Thus proforma, after the Fund 4 capitalmovements and the CD3 distribution paid in August, total cash held by the fourfunds in Australiawas A$107.2m (before deducting the $2.4m deal costs). This is on top of cashheld on behalf of the four funds in USA/ Caymans, which I estimate was proforma A$42m.
TheRE states that the buyback before the Merged Fund is delisted will be for a maximumof 26.8m units, being 10% of the enlarged capital.The market price of CD3 is $1.35, and its NAVis $2.24.If the maximum buyback were tobe carried out, that would use cash of between A$36.2m and A$60m, taking currentmarket price and the NAV as the ends of the range.At the midpoint, it would absorb $48m, soleaving $107.2m – $48m -$2.4m deal costs = $56.8m.That is close to the $62.6m cash held now byfunds 1 to 3, which should be distributed NOW to those investors. Under the RE’splan, even as “improved”, that $56.8m cash residue (or even more, if thebuyback used less than $48m) would stay in the Merged Fund, diluting returnsfor over a year until the RE honoured withdrawal requests.This is crazy and pointless.
Itagain shows how muddle-headed the RE’s thinking is: terrible strategy driven bythe RE being hell-bent on pursuing more fees.
Anothervery odd point is that the Merger Proposal is completely at odds with E&P’sstrategy for its own business, quoted in the AFR “Spokesmanfor E&P referenced the report and said the merger was ‘consistent with E&P’sstated strategy of exiting real assets and focusing on core equities strategies.’” Converting all the four existing CD fundsinto an evergreen private equity fund is exactly the opposite of that.E&P’s statement contradicts what it is actuallydoing. Are E&P and its directors totallyconfused—or do they intend to sell off the newly created perpetual managementrights of the Merged Fund soon after this deal is bedded down?
Afterthought. I have posted previously “E&P have clearlybeen working on this proposal for a long time- but without any discussions withinvestors- to be able to undertake the legal work and the preparation andcompletion of the expert’s report and the EM by 7 October. The Augustupdate [of funds 1 to 3] - issued on 14 September- was the first publicreference to it, but I expect that they had been working on it well beforethen.” I have never looked at fund 4’s announcements before, but its point(above) made on 29 June re “enhancing the liquidity” mirrors what E&Peventually told investors in funds 1 to 3… but 10 weeks later!
As always, this is not advice. DYOR.
(20min delay)