GVF’s portfolio benefited from two significant developments during August. The first was a substantial share price re-rating in Blue Sky Alternatives Access Fund BAF, one of GVF’s largest holdings and an investment that we have been intimately involved with for some time. We first invested into BAF in late 2018 after a high profile short-seller’s report came out against the parent company of BAF’s investment manager. This report made a number of allegations, including an assertion that many of the assets that the Blue Sky group managed were materially mis-valued. These allegations were sensationalised in the press and, in our view, served to create a narrative in the market that material write-downs to the carrying values of BAF’s assets were imminent. While the countless press articles written about the Blue Sky saga made for dramatic reading, we did our own thorough due diligence on the BAF investment portfolio before investing. Our conclusion was that the underlying portfolio of agricultural, real estate and private equity assets were worth substantially more than the then prevailing share price. At the time this was a controversial view.
In mid-2019, Miles Staude, GVF’s portfolio manager, joined the BAF board to add his expertise to the necessary process of extracting the company from its existing management arrangements and rejuvenating the BAF investment proposition. With the parent of BAF’s investment manager having gone into administration, this exercise required lengthy and determined negotiations with a number of different counterparties. Pleasingly, during August, the BAF board announced that it had finalised these negotiations and that an extraordinary general meeting (EGM) would be held in early September to approve the terms the BAF board had secured. On 8 September, BAF shareholders voted overwhelming in favour of the new arrangements for the company. These involve moving the investment management function of BAF to Wilson Asset Management International, whilst still also retaining many of the valuable benefits shareholders enjoyed under the old management arrangements. In addition – and much to their credit – WAMI have agreed to a new ‘Premium Target’ objective in their appointment as manager. The principle of the Premium Target is simple: BAF’s share price needs to trade at a premium to its pre-tax net asset value for a period of one month for it to be achieved. If this does not occur at least three times during the next five years, shareholders will automatically have the right to vote to terminate the arrangements with WAMI and to liquidate the company. Our view is that this feature provides a strong alignment between WAMI and its shareholders in terms of tackling the key challenge the company faces, namely the large discount to asset backing that its shares trade at.
From the beginning of FY2021 through to the time of writing, BAF has already delivered a total shareholder return of 28%. Despite this, the shares today continue to trade on a large discount to their pre-tax asset backing and we continue to see exciting upside from here, as the benefits from the new management arrangements begin to come into effect.
Thankfully, not all of GVF’s investments require us to roll up our sleeves and expend the amount of energy that BAF has required. What was unique about this situation was the very deep levels of value that were on offer and our belief that we could affect positive change for the benefit of all shareholders. Finally, it is worth highlighting that while our original view on the true quality of the BAF investment portfolio was controversial at the time, it has ultimately been validated. There have been no significant asset impairments during the time GVF has been invested in the company. Instead, the most important developments have been impressive total returns from the Argyle Water Fund – by far BAF’s largest investment – and a substantial uplift that occurred from the successful sale of the student accommodation portfolio. This exit took place in October 2019 at a 17% premium to carrying value.
– from Global Value Fund (GVF) August Investment update.