E&P vultures hide the CD Funds carcass but will it work?, page-10

I strongly agree with Hobbes29 in his series of postsabove. I am an investor in CD1, 2 and 3, but not in CD4 and cannot comment on CD4.

In particular, CD1 and 2 are now 10 years old and, exceptfor small top ups, the, underlying funds are not making new investments. Thecrucial distinction between CD1-3 and the failed merger proposal, is that CD1-3will eventually sell all their investments and return cash to unitholders—they donot reinvest the proceeds. Hence, as the cash is gradually returned, the gap between their market unit prices and book value should eventually converge to zero. The average age of the remaining investments in CD1 and 2 is rather high, by conventional PE holding periods, so I would expect the managers of CD1 and 2’s underlying funds to pursue an accelerating process of selling most of their investments over the coming 12 – 18 months, barring major upsets in US capital markets.

The CD funds have been steadily, albeit erratically,distributing cash from asset sales to the listed fund unitholders. My main frustration,as well as those stated by Hobbes29, is that E&P- who make the decisions onwhen and how much to distribute to unitholders- are making the CD funds hold onto more cash than is necessary for their investment activities, after allowingfor taxes and fees. Despite this, I am still hopeful that the 3 listed funds shoulddistribute a lot more cash during calendar 2023.

A legitimate concern is whether the NTA amounts thatthe RE publishes each month are justifiably supported by the US investment valuations. Here, we are entirely dependent on the competence and professionalism of the General Partner (Cordish USA) and the underlying fund managers. PE valuations tend to be a secretive process, although all reputable managers should follow industry valuation conventions. As long term managers of PE capital, seeking repeat business to manage funds on behalf of retail and especially institutional clients, it would not be in their interest to overvalue their CD investments, either deliberately or accidentally.

There are other factors that also suggest valuationshould not be a major concern in CD1-3. The CD funds, especially CD1 and 2, have been running for many years, and have sold large numbers of their investments over that time. Based on recent reports from Cordish (i.e. the US manager, not E&P) the actual selling prices, on average, comfortably exceeded their immediately preceding book value in the CD accounts. I.e. the book values have proved to be understated, on average, with respect to the assets actually sold to date. Unless the future is extremely different from past practices, that should give comfort that the current book values – based on similar valuation practices and market experience- will ultimately prove to be reasonable when the assets are sold. The only caution here is that a few of the underlying funds of CD3 are now being carried at values much higher than the cost of their original investments- i.e. with a much greater unrealised gain than is the case across CD1 and 2. This large unrealised gain (it’s only significant within CD3, and only in a few cases) has emerged over the last 3 years. If CD3 was a new fund with no track record of asset sales ( or no reputational record of the underlying managers or Cordish as the GP), one would be worried that some of the CD3 assets (in its underlying funds) might be overvalued and hyped. That might still turn out to be true- but given the 7 years history of CD3 to date, and the reputations of the managers involved, it’s fair to hope that these large unreleased gains will not collapse. Also, the effect of the gains attributable to 2 or 3 sub funds of CD3 is muted by CD3 fund having to provide deferred tax and performance fees against those gains.

I agree with Hobbes- the CD funds started to divergefrom NTA in 2018 when the URF scandal exploded (same RE) and the discounts havewidened ever since, no doubt as mis-sold investors have been leaving, as wellas others who have gone stale on the funds. The problem is E&P, not the USmanagers or the assets.

Thisis not advice, DYOR. However I am certainly NOT a seller at these levels. I intend to stick tight and wait for the cash distributions to continue to roll in. As more and more assets are sold, the ASX price discounts to NTA must narrow. This has been a long haul, and may take at least another year to see MAJOR restoration of value, but I am optimistic (albeit impatient for change, and in full agreement with the concerns that Hobbes has raised).