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One of the greatest sleights of hand in modern finance is taking illiquid assets — ones that can’t be sold in a hurry without big price cuts — and making them look liquid. While it’s all the rage now, UK investment trusts have been doing it since the 19th century. Hedge fund manager Boaz Weinstein’s campaigns suggest that for some, the jig is up.
Saba Capital, the fund Weinstein runs, this week fired another broadside against Gore Street Energy Storage Fund, a trust that specialises in grid batteries, arguing it should wind itself up to close a roughly 35 per cent discount to its net asset value. Gore Street says dumping its assets now would not realise their full value, echoing London property fund Workspace, a former target where Saba was unsuccessful.
Weinstein has now rattled the cages of more than a dozen UK investment trusts. And as his campaigns have evolved, calls for liquidations have become part of the toolkit.
Discounts in listed trusts are commonplace. All 15 UK-listed renewable energy infrastructure trusts, for example, trade at an average discount of 23 per cent of the net value of assets in their books. But why? The simple answer — that the valuations shown in their published reports are too high — doesn’t really justify calls to liquidate. After all, if the share price merely reflects what the assets are really worth, selling them and returning the cash to investors wouldn’t deliver much value, if any.
Alternatively, investors might fear that while the assets are in theory fairly valued in the trust’s books, managers will be somehow forced to sell for less than that, or are mismanaging what they own. In that case, replacing executives ought to erase the discount without having to wind the trust up.
Perhaps though, discounts are just a feature of the species — the result of habit rather than actual logic. For long-term investors, who buy trusts for their dividend yield, the discount may not be of much concern. Perhaps the market just doesn’t get it, and investors will have to simply wait until it does. Gore Street’s executives might be sympathetic to that argument: they say there are better days ahead in the energy storage markets.
The problem there, though, is that it suggests the main purpose of these vehicles has failed. Sure, investors can sell at any time, which is one core feature of liquidity, but by doing so, they have to shoulder a big de facto penalty, which is the classic problem that comes with illiquid assets. The only way to achieve full value, in other words, is to be patient. If the UK is any example, financiers’ quest to square the liquidity circle has some way to go.
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