Liquidation (covered at £0.47)
ADIG is a £140m investment trust that is winding down. It currently trades at £0.47/share – a 30% discount to the estimated £0.68/share NAV. What was supposed to be a drawn-out multi-year liquidation, might now wrap up much faster. The company has just announced it is in talks to sell the whole portfolio in one go:
The Board confirms that it is in early-stage discussions, on an exclusive and confidential basis, with a third party regarding a potential transaction in relation to all or substantially all of the remaining portfolio. This third party is currently undertaking a due diligence exercise in respect of the portfolio and the Board will provide further updates, as appropriate, in due course.
While it is completely unclear if anything will pan out from these discussions, investors are paying very little to wait and see. Before this announcement, the stock was at 44.5p, and also had traded in a narrow range of 42-46p for the most part of last year. So if talks fall apart, and ADIG’s price reverts to pre-announcement levels, the losses would probably be at/below 5%.
But if the portfolio sale goes through, it will likely have a positive impact on the stock. I don’t expect the portfolio to be sold at full NAV, but even if the current discount just narrows by half, the upside could be 20-25%.
This is the first time since liquidation began (Feb ’24) that management has disclosed such talks, which I view as a positive. The vehicle is already in liquidation, with the entire portfolio expected to be disposed of over the coming years. I do not think management would have announced anything if the likelihood of the transaction materializing were low. Therefore, management likely believes the deal is reasonably probable. Management has also previously highlighted (quote below) that they don’t want to sell at a large discount and would rather wait for better market conditions—this is the key reason for the prolonged liquidation timeline. This means either management has changed its stance, or the interested party has offered attractive terms.
“The Board believes that these longer-term investments are, in the large part, attractive, saleable assets but remains cognisant of the fact that early disposals from its private markets portfolio in current market conditions would necessitate a substantial discount to their long-term realisable values, and thereby limit the value that could be achieved for shareholders. As market conditions improve, opportunistic secondary sales would be sought by the Company to realise value from these assets in a timely manner.”
The risk of NAV drift while we wait is low—the timeline is short, likely a couple of months till we hear something The portfolio is diversified, comprised of investments in various unlisted funds, which generate substantial amount cash for ADIG. FX exposure is spread across multiple currencies and is unlikely to have a material effect either.
So the bet is essentially to risk a 5% loss and lock up capital for a few months with expectation that ADIG’s discussions to sell the whole portfolio will result in a transaction.
ADIG once held a diversified mix of public and private assets. But the portfolio underperformed, and the fund persistently traded at a 20-30% discount to NAV, making it tough to scale. In February last year, shareholders voted to liquidate the trust. ADIG quickly sold its public holdings and returned most of the proceeds to shareholders (£0.38/share, or 35% of NAV at the time).
The remaining portfolio is entirely made up of private market assets (90%) and cash (10%). The private assets are a mixed bag of minority stakes in 28 private funds. The funds are spread across a wide range of sectors: real estate, leveraged buyouts, aircraft leasing, litigation finance, life sciences, and etc.
These assets produce an income stream of around £9m annually. Cash holdings (largely invested in various money market funds) generate another £1m. Management fee and admin costs total to around £2m. ADIG has to pay out not less than 85% of its earnings to keep the investment trust status, though dividends will be irregular going forward.
The portfolio also comes with £33m in undrawn commitments, which essentially are obligations to invest more cash into the funds ADIG already holds. That might sound like a drag, but it’s a pretty standard feature for these types of assets, and majority of the commitments is offset by the current cash balance (£21m).
Around half of ADIG’s private asset portfolio is set to mature between 2025-2027 (First Tranche), while the other half matures between 2029-2033 (Second Tranche). The previous liquidation plan was to sit tight until the First Tranche matured while opportunistically selling the longer-dated holdings when market conditions improved. The market for these types of assets has been tough (see the quote from last month below), so the full wind-down was previously expected to drag on for 3+ years.
Although the market for secondary sales of private assets has in general improved recently, liquidity remains very selective and focused on the most attractive sectors. Accordingly, the Board believes there remain challenges in achieving secondary liquidity and attractive pricing for the Company’s less liquid investments.
The risk is that this quirky, illiquid portfolio could be difficult to sell at an attractive price, and the ongoing talks fall apart. However, given minimal downside, and a short timeline, this looks like a compelling bet.
How reliable is the £0.68/share NAV? If it is based on a portfolio of PE funds couldn’t it be way overstated given PE funds get to mark their holdings as they please?
ADIG has not yet disposed of any private market assets (which comprise the vast majority of NAV), so it’s difficult to confirm whether NAVs might be overstated. That said, given that the portfolio is highly diversified and that the fund NAVs are revalued regularly (semiannually, judging by ADIG’s financial reports), I’d think the NAV should be directionally accurate.
The private alt assets ADIG holds are levered play on the market, which hasn’t been doing well recently (check out the performance of alt managers such as BX/KKR yesterday).
I won’t be surprised if a further 10% decline in S&P will wipe out most of the NAV discount and this arb opportunity if unhedged. So maybe we should find a way to hedge.
I have the same concerns also for Pacific Current (PAC). Its holdings are double/triple levered play on the market.
Haven’t said the above, I also note that the listed PE funds (e.g. HVPE, PIN, NBPE) on the London market have been holding up pretty well recently.
UK Private Equity funds are generally on discounts between 30-45% of NAV, and I’ve seen various analysts comment that their valuation methodologies are very conservative. Most are in the midst of large share buybacks as well. So I think there’s already significant value in that sector.
How is management compensated during this time? Incentive to pro-long?
The management fee is 0.5% of NAV, or roughly £1m per year. Hard to say. This is a common risk in liquidations. That said, ADIG moved quickly in selling its public assets last year after the liquidation was approved.
You can now buy this for 43p after the recent sell off. However, I suspect that the buyer who was interested in bidding for ADIG’s entire portfolio may no longer be interested or may not want to pay anything near to the current NAV.
Private equity is basically leveraged small cap equity.
I expect the “real time” NAV to have already fallen by at least 1.5 times IWM, which has declined 19% YTD.
I think the discount to real NAV has already been wiped out.
Oh no! Confirmed that the single buyer of the portfolio has been rejected by the board.
https://www.hl.co.uk/feeds/apps/rns?id=35016430
Yes, it seems that the final offer was too low.
Instead of a single exit, the company will now run a secondary sales process via Campbell Lutyens. The idea is to break the portfolio up and sell it off in parts to multiple buyers. The board still expects discounts to NAV, but believes it can extract more value this way than from the recent failed bid.
The “buyer” is very likely to be another one of the London-listed private equity secondary funds (HVPE, PIP, ICGT, NBPE, etc), all of which are traded at deep discounts to NAV and limited liquidity.
” The consideration for the Third Party Offer was principally payable in listed shares plus a cash element.”
So even if the transaction had gone through, it would still take a long time for ADIG to wind down.