Summary: Tribeca Global Natural Resources (TGF) has an "active long short investment strategy that seeks to profit from from the inherent volatility in the Natural Resources Sector." Exposure to commodities is a popular investing trend (diversification, hard assets), but seeking active management is inevitably a loser's game. TGF hasn't disappointed, the underperformance has been immense! In this post, I focus on one of the many downsides of the Closed End Fund (CEF) structure: their ability to raise capital below NTA and dilute existing shareholders. This can't happen with open end funds, including ETFs. TGF recently undertook a very dilutionary capital raising that Tribeca claimed was driven by the interests of shareholders! I provide details showing how damaging this really was, and why TGF's discount deserves to get wider.
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| TGF's dilutionary raising was just the latest extraction move on shareholders |
Details:
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1. TGF Key Facts
30 June 2023:
Share Price: $1.72. Pre-tax NTA: $2.23. Discount: 23%
On 22 Feb 2023, TGF announced a Placement and Entitlement Offer to raise up to $51.66m. It actually seemed quite proud to advise all new shares would be issued at a 21.6% discount to post-tax NTA as of 17 Feb 2023:
ASX companies under Listing Rule 7.1 can increase shares up to 15% every 12 months without shareholder approval via a Placement capacity. The placement was to Wholesale and Sophisticated Investors only and retail investors were significantly diluted:
TGF. 17 Feb 2023. Pre-tax NTA: $2.72. Post-tax: $2.68
Feb 2023 Share Count: 61.5m
Placement: 9.225m shares at $2.10 (23% below Pre-tax NTA)
Post-Placement NTA: 70.73m shares at $2.64 Pre-tax NTA
Note this was just the Placement dilution, if the Entitlement offer had been fully subscribed it would have diluted shareholders not participating by more than 10c/share extra. Only a crash in the NTA prevented this.
Have you heard of an ETF manager doing dilutionary capital raisings? Obviously not, it's outrageous! Indeed, it's not permitted for any Open End Funds (listed or unlisted, active or passive, ETF or not) to issue new shares at anything other than NAV. Yet, just because CEFs have captive capital and are listed on stock exchanges, capital raising latitude, that is wholly unnecessary for investment funds, is legal and exploitable.
Remember, Tribeca could have sought to raise as much capital as it can (deserves) at NTA. It could have sought to let shareholder's vote on this dilutionary raising given it was supposedly for their benefit. It didn't. Instead, it just ruthlessly pursued its own interest of earning more fees from a larger capital base. Existing shareholders be damned!
Other Australian CEF managers would have been watching with interest. At least Geoff Wilson gave Tribeca some stick:
“I don’t know how the board justifies to shareholders doing a placement to new shareholders at a discount to NTA, and how this would help remove the discount to NTA,” said high-profile LIC manager Geoff Wilson. Wilson Asset Management is not an existing shareholder, and did not participate in the placement.
Portfolio manager Ben Cleary acknowledged that the raising could be dilutive, but said the benefits outweighed any dilution. “I’m a big investor myself, I get the dilution angle, we structured the raising so it was more skewed to a rights issue to allow existing investors to participate in the placement,” he said, adding the book closed early at three times oversubscribed.
2. TGF Key Insight:
In the AFR, Ben Cleary defended the dilutionary capital raising and made several arguments in addition to those outlined in the TGF ASX announcement. See: AFR - Tribeca dismisses discount concerns in LIC raising.
a. Capital raising was "skewed to a rights issue"
TGF could have issued options to existing shareholders or at least completed an Entitlement Offer first before the Placement. It turns out the vast majority of issued shares were the Placement with large dilution.
b. The Placement "closed early three times oversubscribed"
This only goes to show that TGF could have raised capital with much less dilution. In setting the $2.10 at a 23% discount it was seeking to ensure the full Placement raising without concern for dilution.
c. “I speak to my investors regularly, there’s always going to be some that are disappointed, but the overwhelming majority were positive on it.”
This is totally false. The overwhelming majority were opposed (see Hotcopper - TGF). No evidence was supplied to back up this ridiculous assertion.
d. Capital raising "tackled investor concerns to some extent about liquidity as it sought to close the discount"
TGF has endless sell-side liquidity. All non-Tribeca existing holders would happily sell every share if they could get out near NTA. Buy-side liquidity near NTA is fanciful given its shocking underperformance, unjustified Total Expense Ratio, and ongoing exploitation of captive shareholders.
e. "LICs with more liquidity tend to trade at a premium"
There's actually plenty of buyers for TGF at appropriately-deep discounts, which as of August 2023 is over 20%. What TGF shareholders dream of is it trading near NTA. But that is impossible as TGF is a CEF, its sky-high TER ensures it is destined for long-term underperformance, and its ~5yr performance since listing has been abysmal. TGF briefly traded at a premium before the reality emerged, but will never do so again.
f. Capital raising "capitalised on a favourable backdrop for metals prices"
TGF increases and decreases its leverage and changes sector exposures regularly. Tribeca's inability to time commodity cycles and efficiently manage investment capital can be seen in its disastrous performance.
g. Capital raising increased TGF's relevance in the market
TGF's only relevance among ASX-listed funds is to highlight why almost all active funds exist, and certainly all active funds with TERs over 1% (TGF's TER ranges from 4% to 12% depending on performance fees). Active funds exist to make fees for the fund manager and sustain jobs in financial services - most of which depend on the myth of active management. TGF now has many more shares but even less relevance to investors.
h. Capital raising improved the prospect of broker and research coverage
TGF is already covered by Bell Potter, Independent Investment Research, Livewire, Affluence Funds Management, etc. Exceptionally ruthless exploitation of shareholders (such as TGF's scale of dilution) may only make positive research coverage less tenable or defensible.
i. Capital raising will garner additional interest from financial planners
Commissions have ended so financial planners now need to set defensible critiera for investment product recommendations or approved lists. Combined with its underperformance, Tribeca's disrespect for shareholders will only entrench a negative outlook. Savvy financial planners will have discovered the exorbitant TER level and crossed it off from consideration as its destined underperformance will reflect upon them.
What dilutionary capital raisings reveal about the extent of extractive activity in a CEF
The reality is that TGF encapsulates many unobvious CEF pitfalls, one of them being huge LIC tax leakage. Tribeca wanted to start fully-franked dividends in order to relieve pressure on TGF to wind-up, convert or be taken over. However, it didn't want to reduce the capital on which it charges its lopsided fees, so the dilutionary capital raising was timed with the dividend announcement.
The biggest downside to CEF capital raisings that are heavily dilutionary is actually the loss of trust with investors. As 15% placements can be done every 12 months, who would trust Tribeca not to do this again? Management fees (1.5% ex GST) and Performance fees (20% ex GST) are charged on the value of the portfolio not the market cap. So raising capital means more fees, regardless of the share price! Apart from takeover risk, Tribeca isn't motivated to minimise the discount - it affects shareholders not Tribeca.
Affluence Funds Management burned by dilutionary raising and sells down TGF
As of Feb 2023, Affluence Funds Management had TGF as a top allocation in its LIC fund. However, Tribeca had promised them they wouldn't raise capital below NTA and then did so at a massive discount. Affluence highlighted this disrespect for shareholders as indicative of long-term expectations regarding TGF, and thus sold down its position:
Since inception on 12 Oct 2018, TGF has delivered -5.28% annualised! The cumulative underperformance is immense.
Since the 22 Feb 2023 capital raising, which was supposedly driven by shareholder interest in closing the discount and amping up bets on performance, TGF's share price performance has been even worse at -13.8%!
TGF continues to hand out the painful lessons about who Closed End Funds are actually created and run for: investors or the fund manager and active management industry? Tribeca's shameless extractive decisions make the answer obvious!
Links:
> AFR - Tribeca fund getting alpha returns out of commodity rout
> AFR - Tribeca digs in for $50m listed fundraising
> AFR - Tribeca dismisses discount concerns in LIC raising
> AFR - Tribeca Global Natural Resources raise falls well short of the mark
> Citywire Australia - Tribeca raising prompts LIC questions
> Investment Centre - Tribeca Global Natural Resources Unlisted Fund
