Tag Archives: SGF

SGF tender offer results

I closed my position in SGF today for a loss of 1.74 percent. While the main part of the thesis proved to be correct, the acceptance rate was 51.3% instead of the 25% worst case scenario, the discount to NAV of the fund increased from ~5% to ~10% after the completion of the tender offer (it was ~6% before the offer was announced). I think this was a bit of negative variance, although other explanations are also possible such as the market already anticipating the tender offer or front running by insiders.

From a big picture perspective I actually think it’s not unreasonable to assume that the discount to NAV should be smaller on average after a tender offer, since it is reducing the available supply of the fund while it should not reduce demand (I would actually see it as positive for existing or potential new holders). At the same time there are shorter term dynamics caused by people such as me that buy before the tender, and sell after.

The Singapore Fund tender offer

The Singapore Fund is a closed-end fund that is focused on equities listed in Singapore (surprise!). The fund is currently trading at a discount of ~5% of NAV and has announced an in-kind tender offer for up to 25% of all shares outstanding at a price of 99% of NAV. As is common in these kind of transactions holders of small positions are given a preferential treatment compared to holders of bigger positions, creating opportunities for those with a (very) small portfolio. The SGF tender offer has two of these mechanisms in place.

The small idea

If you own 100 shares or less you will not get prorated if more than 25% of outstanding shares are tendered, and you will not get paid in-kind, but in cash. Since the shares of SGF are priced at 12.93 that would mean that you would be able to create a $1293 position that has a positive expected return of ~4% in a week time (the offer expires March 14). That’s a pretty good return, but obviously the position size is severely limited. I would not be too lazy to pick up 50 dollars in EV, and even better: you can reduce most of the variance in this bet by hedging your market exposure using an ETF such as EWS that tracks the MSCI Singapore Index. The not-so-scientific proof:

The bigger idea

There is however also a preferential treatment for people who tender less than 2500 shares. Instead of receiving odd lots of securities listed in Singapore, those holders also receive cash, but just like the bigger positions they are prorated if more than 25% of shares are tendered. That makes it harder to evaluate the expected value of going long more than 100 shares SGF, since it’s unknown how much shares will be tendered. You are certain to make a profit on 25% of the tendered shares, but if the discount to NAV returns to the 6% SGF traded at before the tender offer was made you lose a bit on EV on the remaining 75% of your position. Add in some transactions costs and going long SGF could have zero expected value.

This is however an unrealistic pessimistic scenario because for all kinds of reasons not all share holders tender their shares. This can be because it’s simply impossible. In this case you can only tender more than 2499 shares if you have an account capable of receiving Singaporean securities (my broker – Interactive Brokers – can’t). But it could also be that people are perfectly happy with their position in SGF, and don’t want to sell.

Past year I participated in a tender of a Russian company that was willing to buy 7.71% of stock back at a huge 50% premium. A deal that you would think no-one would be willing to pass up, but in the end the proration factor was 10.95%. Part of the reason: Russian shareholders had to tender their shares in person – standing in line for days! – while the USA listed ADR’s could be tendered with a few clicks of a mouse.

But to get back on topic: there is actually some scientific evidence that proration factors, and specifically those for close end funds trading at a discount, are significantly higher than you would expect based on a 100% participation rate. This paper, that looks at a sample of 71 CEF tender offer repurchases in the period from 1994 till 2006, finds that the average realized proration factor is 79.98% versus a 25.87% expected value. And that’s in a sample where the average discount to NAV is bigger than that of SGF.


While it’s hard to know what the expected value of the bet exactly is, it is a case of heads I win, tails I don’t lose (much). I have created the table below, based on a 2000 share position in SGF and a 2100 share short position in EWS, that shows the expected profit based on various possible proration factors.

It’s important to note that the expected profit can be materially different than the realized profit because the hedge is not perfect, and there is no guarantee what exactly the discount of SGF is going to be post tender offer. But having some potential variance in your portfolio is not a problem, as long as the dollar amount at risk is not too big relative to the total portfolio value, and the variance is not correlated with your portfolio.


Author is long SGF, short EWS