Two big WA-based super funds are being urged to join opponents to a proposal by the LinQ Resources Fund (LRF) to buy-back a combined 30 per cent holding from two activist hedge funds, amid claims the exclusive exits would be unjust.

On Christmas Eve 2007 the LRF, a listed investment trust, announced it had arranged exits for two hedge funds that had agitated to secure redemptions from the fund at prices above what the market was offering. Pending unitholder approval, LRF would establish another vehicle, named LinQ Resources Fund 2 (LRF2), to buy Boston manager Weiss Asset Management’s 13.8 per cent stake at 90 per cent of net tangible asset value (NTA). It would also run an auction through which prospective and current unitholders could buy shares from London firm Carrousel Capital Management’s 16.15 per cent holding within the range of a 0–14 per cent discount to NTA. LRF2 would underwrite any units left over from the auction at a 15 per cent discount to NTA. The $1.2 billion WA Local Government Super Plan and $377 million Fire and Emergency Services Super are significant shareholders in LRF, owning 7.5 per cent and 4.3 per cent respectively. Representatives from both funds were unavailable for comment at press time. Boutique alternatives manager Select Asset Management also owns 4.3 per cent of LRF, and will oppose the proposal at the February 22 vote. Select argues that the exclusive deals are unfair and could place remaining unitholders’ capital at greater risk. While it does not oppose ‘greenmailing’ strategies deployed by some hedge funds, which, in this case, have seen activist funds push for better capital management, lower discounts to NTA and a company buy-back of their holdings at a premium to market value, Select regards the LRF proposal as unreasonable and unfair since other unitholders are not being given the opportunity to redeem their holdings at the same percentages of NTA as the hedge funds. “We’d like to see any offer made open to everyone,” Dominic McCormick, Select chief investment officer, said. At January 29, the reported NTA of an LRF unit was $1.80. If investors sold units in the fund on that day through the ASX they would have received, on average, $1.34 for each unit. If the special deals arranged for the hedge funds underwent transaction at these prices, Weiss would net $1.62 per unit and Carrousel $1.53 per unit. In its proposal to unitholders, the independent expert said it would use the NTA and market prices recorded on November 30 2007 to conduct the hedge funds’ exits. In the time since this report was published, the discount has widened significantly. If the hedge funds are successful in selling their shares at a premium to the market price, this could lead to other activist funds using such strategies to extract similar outcomes, McCormick said. That LRF2 might be forced to take on debt to buy-back the Weiss and Carrousel holdings – which current investors would pay for in a market environment where debt is expensive – was also concerning, he said. While LRF2 stated it would aim to cancel or sell the shares it would acquire under the proposal, potentially enhancing the NTA of the units, no commitment to do this within any time frame or price range has been made. Select is planning to write to unitholders before the voting deadline to persuade them to reject the proposal.

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