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.

2 thoughts on “SGF tender offer results

  1. restirw

    Your explanation of supply and demand is a bit academic (naive :P) imo. After the tender offer was made public, the daily volume traded more than doubled. People get in to scalp the tender offer, they drove they discount down, now they have to get out. They made money in the tender so they don’t care about closing the other half of the position with a small loss, they want to close their position to deploy capital somewhere else and thus are driving the discount up. Just as you and I did. Same thing happened with KEF in the previous tender offer (in which I did not participate).

    Your explanation relies on an efficient market in which all participants take rational choices about the tender offer. In practice I think most shareholders are retail clients who don’t even know about it.

    BTW, why is it good for potential new shareholders that the discount goes down?!?

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  2. Hielko

    Obviously the market is not efficient here, the big difference between the expected ‘efficient’ pro-ration factor and the real pro-ration factor is saying enough. But if the increased buying pressure reduces the discount from 6% to 5%, should you expect that the selling pressure after the completion of the tender offer is going to increase the discount significantly above the original 6%? I certainly counted on it to reverse to the original value, but don’t think it’s logical to think it’s going to end up higher. 50% of the shares were accepted in the tender offer, so presumably the force that compressed the discount from 6% to 5% was bigger that the force that increased it after the tender offer.

    I don’t think that a smaller discount for potential new holders is more attractive, but if the discount would have stayed at 6% the fund would be more attractive than before the tender offer was made. Because now you know that you are buying into a fund that is willing to provide some liquidity at NAV. I would also think that there are holders of SGF that tendered their position and bought it back after the tender offer, so that should counteract the selling pressure somewhat.

    But I certainly could be wrong on how this should work; the people buying to exploit the tender offer are of course only willing to buy at a certain discount, while post tender offer they might be willing to sell at any discount.

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