Africa Opportunity Fund (AOF.L) – Liquidation – 70% Upside

Current Price: $0.60

Liquidation Value: $1.019

Upside: 70%

Expiration Date: mid-2022

This idea was shared by Joerg.

 

This is an interesting liquidation play, however, AOF is extremely illiquid and unavailable for trading on IB – so this situation is applicable only for those with access to local U.K. brokers.

The Africa Opportunity Fund is a closed-end, London-listed, investment company that invests mainly in sub-Saharan African equities and bonds (the latter to a smaller extent, mainly as a place to park cash). Since mid-2019 the company has been slowly liquidating its existing portfolio. About half of the portfolio has already been liquidated last year and the proceeds have been distributed to shareholders (via redemption of shares at NAV):

• In March 2020 the company redeemed $18.5m, which represented about 40% of the NAV at the time.
• In June 2020 the company redeemed $5.5m (21% of NAV).
• June 2021 – redeemed $7.2m, around 30% of NAV.

The liquidation period is set for 3 years, until mid-2022. Current NAV (16th July’21) stands at $1.019, which offers a 70% upside to current prices and a timeframe of 1 year. According to the resolution, the liquidation period can be prolonged in case the company doesn’t manage to liquidate in this timeframe (staged return policy). Management aims to maximize the return for shareholders instead of putting pressure on some of the more illiquid holdings during the liquidation process.

Insiders’ incentives are well aligned here – two founders Francis Daniels and Robert C. Knapp own 15% of the shares. Management/performance fee structure is also designed to benefit the shareholders – under the resolution management fees have been reduced to 1% of NAV in the first two years of liquidation (until mid-2021) and 0% in the third year. Previous performance fees have been replaced by realization fees (1% on net realizations from now on).

Aside from that, the major presence of an institutional shareholder gives additional confidence in a smooth liquidation process – 37% of AOF is owned by the City of London Investment Group (asset manager with a $330m market cap).

18% of the current NAV is cash, which is also a positive and signals another upcoming redemption coming soon.

 

Risks

• AOF holdings have been performing very well this year, especially the Zimbabwe assets and African Leadership International. This led to a significant increase in AOF NAV to the most recent $1.019/share from $0.662/share in Dec’20. Company’s holdings are mostly public companies, however stock market liquidity of African stock exchanges is low and it is not clear if the assets could be sold at the indicated NAV. On a positive note, AOF values some of its holdings by the most recent secondary market transactions.

We value our position based on share transactions in the secondary market, which will allow AOF to sell approximately 14% of its holding upon closing. We hope to sell the balance of our holding in similar fashion over time.

• The liquidation might take longer than expected. However, given how far things have progressed until now, it seems unlikely that the extension would be very significant.
• Another potential bottleneck of the liquidation strategy could be the two holdings in Zimbabwe (First Mutual Properties and Mashonaland, see table below). It’s currently nearly impossible to transfer funds out of Zimbabwe and it might take a while to make this possible without doing it at a vast discount at NAV. Zimbabwean assets make up around 41% of NAV.

 

Africa Opportunity Fund

The company was created in 2007 by two experienced investment professionals, Francis Daniels and Robert C. Knapp.

Top ten holdings (June’21) from the fund’s monthly factsheet: