Elliott Associates, one of the worlds most successful hedge funds, has launched a bid to acquire the share capital of four Italian REIFs. Last year I spend some time analyzing this sector, and decided to buy a basket of seven different funds. I found these attractive because the funds all trade at large discounts to NAV (often >50%) while they are all liquidating and returning capital to shareholders to coming years. It’s good to see that a big and successful hedge fund is apparently seeing the same value, and has launched a bid for four funds.
Elliott Associates is offering roughly a 25% premium compared to the undisturbed market price, and the big question is of course should I be happy with this and tender my shares or should I keep my position? Elliott Associates is obviously expecting to generate “adequate” returns even at a 25% premium, and I’m pretty sure that what they consider adequate is also good enough for me. On the other hand I also could just take the money now, and try to reinvest it in one of the many other attractive looking Italian REIFs.
A third angle to consider is whether or not a position is warranted just to play the merger arbitrage game. The current spread between the market price and the offer is roughly 6% which is pretty nice. The biggest issue is that Elliott Associates will only accepted tendered shares if they are able to acquire more than 50% of the outstanding share capital, and I have no idea how to handicap the odds of that happening. I can imagine that many shareholders, like myself, aren’t exactly jumping at the opportunity to sell those funds at a 40 or 50% discount to NAV.
What do you think the wisest course of action is here? I think I’m currently leaning towards keeping my positions, and just letting things play out till the funds liquidate.
Author is long QFAL.MI, QFID.MI and various other iREIFs.
What the wise man did in the beginning the fool has done in the end. Congrats on the good work, and on being early. Did these pop up on a screen last year? Or were you just hunting and turned them up?
I think I got the idea from another blogger who had already bought a few of those funds, and then I decided to take a look at basically every fund and try to pick some of the more attractive ones.
I’m not sure if I can add a lot to your reasoning. From the way I see it, you should try to look at it, as if you don’t have positions in the REIFs. Then for every REIF ask yourself the question ‘do I want to buy this as a merger arbitrage? ‘. If yes, then keep your position, if no then sell it.
It’s a bit more complicated than just that one question though. I might want to own it just as a value play, but maybe not as a merger arb play. But then maybe it would make sense to try the merger arb play with some additional shares anyway, since I wouldn’t really mind getting stuck with some additional shares if it isn’t completed for some reason (and the question is how much downside there is anyway if the merger isn’t successful, I think it should now trade permanently higher than the undisturbed price).
They are liquidating anyway?
I think I lean towards agreeing with you to keep them. Its great if they acquire a large % of shares as they might expedite the liquidation/return of capital process for you and you get a freeride on that.
This will only work if someone like Elliott takes control of the fund. As a retail investor, you are at mercy of the managers and I do not look highly on those people.
Buyers beware. Management will not give up without a fight.
I absolutely don’t think the managers of these funds care a whole lot about their investors, but with fixed liquidation deadlines I don’t think that’s really a worry. Most of these funds are already in the process of being liquidated.
Advice from a fool (me): Either tender the shares or sell in the open market as close to the tender price as you can. Then wait, I imagine you will be able to buy back part or all of your position at lower prices sometime in the future if you keep some buy orders open at low prices. If not, you still made a nice profit.
Maybe, but in this case I would suspect that in the case of a successful tender offer the price would not really trade back down again. If Elliott Associates would be able to acquire a 50% position I think that would be pretty bullish news for the remaining investors since then you would have an activist hedge fund that will oversee the liquidation.
What are your thoughts on how the liquidation proceeds will be taxed? From my understanding, there is a 26% withholding tax distributed by the relevant management company to unit-holders.
Since I have already received some liquidation payments I can tell you that most of them will be taxed as a return of capital (zero tax). Might not be the case for all capital that is returned, but for almost all funds the “par” value of the shares is higher than NAV because of a long history of losses.
Also, in regards to Immobilium 2001 you indicated in your spreadsheet last year there was no +3 year extension, however, this (http://www.investiresgr.it/en/fondo/scheda/11/fondoimmobilium2001) website indicates otherwise… Thoughts?
No, all the funds have a three year extension possibility. That spreadsheet indicates if the fund has already taken advantage of that option. So this fund now has a deadline in 2017, but since they haven’t taken advantage of the option the deadline can be moved to 2020.
Thank you for your answers.
Looks like a expiry date has little meaning… Fondo Alpha extended the expiry date for a further 15 years, compared to the original expiry set for June 27, 2015, thus providing the expiry to June 27, 2030.
The fond has a goal of an orderly liquidation by the end of December 2019
2019? Do you mind showing where you see that?
Although there are some general rules and even some laws (last relevant was a decree of the Renzi Government), every fund has its own regulations. For ex., in some funds it is the asset manager who can change the terms of the expiry, while in others only an AGM or EGM can.
All in all, I would say that this is a good season for the Italian property funds because some of them are actually liquidating or being taken over. This greatly reduces overall political and regulatory risk (ie Parliament or Government being compelled into making specific provisions to prolong expiry deadlines for this type of funds).
Thanks for the insight. Sounds like you have been following these fonds closely as well? Are you Italian?
Well some of the funds kind of blew up… Any thoughts on QFIRS & QFOBE?