Active Capital IT set to wind up

Active Capital Trust launched in 2001 with the objective of returning to ordinary shareholders 99.9p a share plus an amount equal to 7.5 per cent a year compounded annually by May 2007. In 2006 shareholders opted to continue the life until May 2012, but with the option of voting on the trust’s future at the 2009 AGM if it did not meet this objective by 31 May 2009.

As it has not achieved this the trust announced today it is proposing to wind up by changing its investment objective to realising investments rather than seeking capital growth over the medium to long-term via a portfolio mainly comprised of smaller UK companies.

This evening Active Capital’s share price closed up 1.09 per cent or 0.5p at 46.25p.

The proposals, which will be voted on at the company’s 27 August AGM, are almost certain to pass as all the major shareholders, which account for 60.9 per cent of the shares, will vote in favour. The source added that Active Capital suggested the proposals to shareholders rather than vice-versa when it consulted with its largest shareholders.

A number of proposals were considered, and the trust’s future was discussed with a number of parties interested in taking it over including the current manager Bluehone Investments.

Although there has been a recent upturn in smaller company shares a source close to the trust said it wished to honour the benchmarks put in place, and that the shareholders it consulted preferred to wind up the trust. The source explained that shareholders have been disappointed in the performance which has not worked out as expected, partly due to the market downturn.

According to WINS data as of 31 July the trust made net asset value (NAV) returns of -43, -60 and -56 per cent over one three and five years in contrast to the UK Fledgling trust sub sector average of -5, -26 and -12 over those periods. The FTSE Fledgling index, meanwhile, returned 21, 1 and 28 per cent over those periods.

Over the year to 31 May 2009 Active Capital reports a 58 per cent fall in NAV compared to a 49.2 per cent fall for the AIM index.

Another concern was the size of the trust which only has a market cap of £24m according to WINS data, and assets of £35m. Market participants have predicted more consolidation among smaller companies trusts while Cenkos head of investment funds Charlie Ricketts argues that investment trusts need to consolidate, as there are more than 300 with a market cap of less than £50m, and these typically have higher total expense ratios.

Active Capital said it will reduce its running costs by £70,000 a year while it is winding up though this will not be achievable immediately.

Cash will be returned to Active Capital's shareholders via returns of capital though the trust may also buy back ordinary shares. Bluehone Investments will oversee the process.

Shareholders will receive the proceeds of realisations on a quarterly basis as long as at least 1p a share can be returned, after liabilities. These mainly comprise the trust’s bank borrowing, £8m as of 29 July.

No timescale has been set out for winding up of the trust, and a source close to Active Capital said it would take as long as is necessary and practical. However once the portfolio is wound up shareholders will be able to choose at a general meeting whether to wind up or reconstruct the company.

Active Capital argues that the proposals will strike a balance between returning cash quickly to ordinary shareholders and maximising value, while the trust will continue to qualify as an investment trust during the realisation process. Active Capital also said that this is the most flexible and cost effective way of returning capital.

In addition Active Capital said the new fee and incentive arrangements with the fund’s manager, Bluehone, will align its interests more closely to ordinary shareholders. Currently Bluehone is paid a basic fee of 1.25 per cent a year of the company’s gross assets plus a performance fee, if following a share buyback due to a tender offer the purchase price exceeds the targeted return.

In this instance Bluehone would be entitled to 20 per cent of such excess in respect of the ordinary shares bought back.

Under the proposed new arrangements there will be a basic fee of £30,000 a month from 1 July, reducing in stages to £10,000 a month from 1 July 2010. There will also be a realisation fee of 1 per cent of the net proceeds on sale of the investments during the 12 month period from 1 July 2009, and an equity appreciation fee equal to 5 per cent of any value returned to ordinary shareholders in excess of a hurdle return.

The largest shareholders, according to Sharescope Alpha, are Friends Provident Group with 17 per cent; Laxey Partners with 15 per cent; East Riding of Yorkshire Pension Fund with 12 per cent; Deutsche Bank with 8.8 per cent; Merseyside Pension Fund with 4.7 per cent and CG Asset Management with 3.4 per cent.