Publication of Circular re. Managed Wind-Down
Downing Strategic Micro-Cap Investment Trust PLC (the "Company")
LEI Number: 213800QMYPUW4POFFX69
2 February 2024
Publication of Circular
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION DIRECTLY OR INDIRECTLY (IN WHOLE OR IN PART) IN, INTO OR FROM ANY JURISDICITON WHERE TO DO SO WOULD COSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THE JURISDICITON.
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF THE UK VERSION OF EU MARKET ABUSE REGULATION (EU) NO 596/2014 AS IT FORMS PART OF UK DOMESTIC LAW BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT 2018 AS AMENDED ("UK MAR") AND IS BEING DISCLOSED IN ACCORDANCE WITH THE COMPANY'S OBLIGATIONS UNDER ARTICLE 17 OF UK MAR. UPON PUBLICATION OF THIS ANNOUNCEMENT, THIS INSIDE INFORMATION IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN. THIS ANNOUNCEMENT HAS BEEN AUTHORISED FOR RELEASE BY THE COMPANY'S BOARD OF DIRECTORS.
Recommended Proposal for a Managed Wind-Down of the Company and associated adoption of the New Investment Policy and Notice of General Meeting
The Company has today published a circular in relation to the recommended proposal for a managed wind down of the Company and the associated adoption of the New Investment Policy (the "Proposal"). The Proposal is subject to Shareholder approval and, accordingly, the circular contains a notice convening a general meeting of the Company to be held at 6th Floor, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD on 28 February 2024 at 11.30 a.m. (the "General Meeting").
A copy of the circular will be submitted to the National Storage Mechanism and will shortly be available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism. The circular will also be available on the Company's website (www.downingstrategic.co.uk). Save as otherwise defined in this announcement, terms defined in the circular shall bear the same meaning in this announcement.
Introduction
On 9 May 2022 the board of directors of the Company (the "Board") announced its intention to provide a significant redemption opportunity to Shareholders on 31 May 2024 (the "Redemption Opportunity") in accordance with the provisions of the Company's Articles. It was envisaged that the Redemption Opportunity would enable Shareholders to redeem or have a matched sale for up to 50 per cent. of their holding in the Company.
Since the announcement of the Redemption Opportunity, the market has continued to undervalue both micro-cap stocks and small investment companies and this is reflected, in part, in the material discount at which the Company's Ordinary Shares have been continuing to trade relative to their underlying net asset value and also in the continuing interest from shareholders in a full capital redemption.
The Board therefore considered the best and fairest ways to meet its commitment of returning capital to Shareholders, seeking to realise the best value, at the time of realisation, for them equitably and, as announced by the Company on 28 December 2023, the Board concluded that it would be advantageous to all Shareholders equally and fairly to commence a managed wind down of the Company's portfolio (the "Managed Wind-Down"). In order to implement the Managed Wind-Down a material change to the Company's published Investment Policy will require to be approved by Shareholders.
Under the proposed Managed Wind-Down process, the Company will be managed with the intention of realising all the assets in its portfolio in a manner consistent with the principles of good investment management and with a view to returning cash promptly to Shareholders in an orderly manner whilst seeking to obtain the best achievable value for the Company’s investments at the time of their realisations.
Background to and reasons for the Proposal
A negative sentiment towards UK small companies has persisted over the past two to three years. Value and micro-cap investment strategies have equally been out of favour and the Company has not attracted a great deal of new investors, with the Company itself being a significant acquiror of its own Ordinary Shares. In addition, investment trusts are currently, generally trading at wide discounts and as the wealth management sector, a significant buyer of investment trust stock, itself consolidates there is little interest from such sector in small, specialist vehicles such as the Company.
This continued negative sentiment has coincided with an intense period of merger and acquisition activity within the Company’s portfolio. Over the past 5 months, three investee companies have been under offer or have fully exited. The total current market and exit value of these companies represents approximately 20 per cent. of the Company’s net asset value as at 31 August 2023. Such corporate catalytic events have continually demonstrated the undervalue of the assets within the Company’s investment portfolio, with the agreed sale of OnTheMarket plc at a premium of approximately 93.7 per cent. to 56.79 pence, being the three month volume weighted average price per share to the last practicable date prior to the announcement of the sale and the recently agreed bid for FireAngel Safety Technology Group plc representing a 46.5 per cent. uplift on its last funding round.
The Investment Manager has estimated that in the course of 2024 cash realisations would be at a significant uplift to the relevant current share price. Further details of indicative returns and estimated timescales in relation to the Managed Wind-Down are set out below.
As noted above, the Board has considered alternative options for the future of the Company, but none have matched the objective of returning capital, at a premium, to Shareholders. The Board therefore believes that the Proposal is a significant opportunity for Shareholders, both those who seek cash and those who may wish to invest the capital they receive from the Company back into the market or to put it to work in other markets.
Therefore, following discussions with the Company’s Investment Manager and given the impending Redemption Opportunity, in the context of the current market outlook and the level of activity in the Company’s investment portfolio, the Board and Investment Manager believe that it is in the best interests of Shareholders to implement the Managed Wind-Down process with a view to maximising timely returns for Shareholders.
Indicative returns for Shareholders and estimated timescales
In the absence of unforeseen circumstances and subject to the market conditions, the Board, in consultation with the Investment Manager, is currently estimating that the Managed Wind-Down could be completed within 2 years. Further, the Board believes, in consultation with the Investment Manager, that within the first six months of 2024 up to, or exceeding, 50 per cent. of the Company’s NAV could be returned to Shareholders in cash (assuming current bids for certain of the Company’s investments complete by then) with more value remaining in the NAV of the residual portfolio to be realised through the process of complete wind-down.
Specifically, the Board and Investment Manager estimate that, on a mid-case scenario, the Company will return:
- on or around the end of the first quarter in 2024, 25 per cent. of Shareholders’ capital at NAV which, given the Company’s discount as at 31 January 2024 of 11.9 per cent., would be a 13.5 per cent. premium to the Current Share Price;
- a further 25 per cent. of Shareholders’ capital at above NAV by 30 June 2024, which on current discounts and NAV would represent a greater than 13.5 per cent. premium to the Current Share Price; and
- beyond 30 June 2024, a mid case scenario for the current market suggests a return above the current NAV and hence a significantly better than 13.5 per cent. premium to the Current Share Price. In order to keep up a timely rate of returns, the Board has constructed an incentive scheme for the Investment Manager (further details of which are set out below) to ensure that Shareholders receive their returns in a timely manner consistent with recovering value and rewarding appreciation above the current NAV.
The above is derived from the Investment Manager's review of what it considers a reasonable outcome for the various portfolio companies and is not a forecast.
In seeking to realise the Company’s investments in an orderly manner, the Board, in conjunction with the Investment Manager, will take into account the continued costs of operating the Company and the impact of the reducing NAV on ad valorem adviser fees. Although current work for the Board is quite time consuming and will continue to be so for some time, the Directors also intend to reduce their fees following the end of the first half of 2024. The capacity to trade in the Ordinary Shares will be maintained for as long as the Board believes it to be practicable and cost-effective during the Managed Wind-Down period and the Board will seek to minimise costs wherever it is reasonable to do so.
Once the Board is satisfied that the majority of the Company’s portfolio has been realised, and subject to Shareholder approval, the Company will be put into members’ voluntary liquidation and wound-up.
Benefits of the Proposal
The Board believes that the Proposal is in the best interests of Shareholders as a whole and should yield the following principal benefits:
- implementing a managed and orderly disposal of investments should maximise the value to be realised on the sale of the Company’s assets and, therefore, returns to Shareholders;
- the Proposal will allow capital to be returned to Shareholders in a cost-effective and timely manner;
- the Company will continue to benefit from the expertise of Judith MacKenzie and her team in generating premium value in the Company’s portfolio and in implementing the Managed Wind-Down strategy; and
- Shareholders can invest the cash that is returned to them as part of the Managed Wind-Down as they wish, including into other funds in this or other markets.
Change to the Investment Manager's fee
If the Resolution is passed, the Board intends to amend the terms of the Investment Manager’s fee arrangement so as to ensure the Investment Manager is appropriately incentivised to maximise the value received from the Company’s assets and in a timely manner.
The new fee structure will combine a reduction in the base fee with the introduction of further fees that incentivise the Investment Manager, and will also align its interests with those of Shareholders, to complete the wind down whilst seeking the best achievable values, at the point of realisation, in a timely fashion in order for the Company to return cash to Shareholders.
To this end, the Board and Investment Manager have agreed that, subject to Shareholder approval of the New Investment Policy, the Investment Manager’s current fee arrangement will be replaced with:
- a basic management fee at the rate of 0.25 per cent. per annum of the Company’s market capitalisation payable monthly;
- a capital return fee which will be applied to the distributions made to Shareholders during the Managed Wind-Down process, with this fee being calculated on a sliding scale dependent on the date of distribution so as to incentivise the Investment Manager towards early distributions on the following basis:
| Period during which distributions take place | Rate of capital return fee on the total value of distributions made to Shareholders within the period |
| Before 30 June 2024 | 0.95% |
| 1 July 2024 to 31 December 2024 | 0.65% |
| 1 January 2025 to 30 June 2025 | 0.2% |
| 1 July 2025 and after | nil |
- an equity appreciation fee payable only on completion of the Investment Manager’s realisation process equal to 2.5 per cent. of all amounts (if any) by which total distributions to Shareholders exceed the net asset value of the Company as at the date Shareholders approve of the New Investment Policy to encourage achieving value appreciation,
subject to an overall cap on total fees payable to the Investment Manager in any 12 month period equal to 4.9 per cent. of the market capitalisation (or NAV if lower) of Company as at the date Shareholders approve of the New Investment Policy.
The notice period that will be required to be given by the Company in the event the Company wishes to terminate the Investment Management Agreement will remain 6 months. Shorter notice may be provided so long as the Investment Manager receives payment in lieu of such notice on the basis of the basic management fee. All the other key commercial terms of the Investment Management Agreement will remain unchanged.
The Investment Manager is a related party to the Company and this change to the fee arrangements constitutes a smaller related party transaction under Listing Rule 11.1.10R. No other changes are being made to the management arrangements at this time.
Means of returning capital
Pursuant to the Managed Wind-Down, the Company will seek to return cash to Shareholders in an efficient and fair manner that accounts for, among other things, the UK tax consequences for Shareholders and the composition of the Company’s Shareholder register.
Returns of capital pursuant to the Managed Wind-Down are likely, in the main, to take the form of bonus issues of redeemable shares to Shareholders and potentially also tender offers and, in such cases, will be conditional on, inter alia, the relevant Shareholder approvals being obtained.
In the light of the advice received from the Company’s tax advisers, the Company intends to implement returns of capital principally by means of a bonus issue of redeemable B shares to Shareholders with a nominal value of £1.00 each (the “B Shares”). Such B Shares would then be immediately redeemed by the Company with the return of cash to Shareholders being treated as capital rather than income from a UK tax perspective.
Dividends
If Shareholders vote to approve the Resolution and put the Company into Managed Wind-Down, the Company will continue to pay a sufficient level of dividend so as to maintain the Company’s investment trust status during the Managed Wind-Down process. The payment, quantum and timing of any dividends during the Managed Wind-Down process will be at the sole discretion of the Board, and the Board will take account of the UK tax consequences for Shareholders in determining the most efficient means of returning realised cash.
The amount of the net proceeds from the Managed Wind-Down that can be paid as dividends and the timing of any distributions will also be determined by the distributable reserves of the Company. There can be no guarantee as to the payment, quantum or timing of dividends during the Managed Wind-Down process.
No further investments
The Company will not make any new investments during the Managed Wind-Down process. Realised cash may be invested in liquid cash-equivalent securities, including short-dated corporate bonds, government bonds, cash funds or bank cash deposits (and/or funds holding such investments) pending its return to Shareholders. Therefore, although the New Investment Policy will provide the Company with the flexibility to make new investments, in certain limited circumstances, it is not expected that the Company will use this flexibility.
Amendments to the Investment Policy
The Proposal involves amending the Company’s Investment Policy and adopting the New Investment Policy to reflect the realisation strategy and the Company ceasing to make any new investments. The proposed amendments to the Company’s Investment Policy are considered a material change and therefore, in accordance with the Listing Rules, the consent of Shareholders to the adoption of the New Investment Policy is being sought.
The Listing Rules also require any proposed material changes to the Company’s published investment objective and policy to be submitted to the FCA for prior approval. The FCA approved the New Investment Policy on 8 January 2024.
Resolution
The Proposal is subject to the approval of Shareholders. The Resolution, which will be proposed as an ordinary resolution, seeks authority to adopt the New Investment Policy. As an ordinary resolution, for the Resolution to pass, more than 50 per cent. of the votes cast must be voted in favour.
General Meeting
The General Meeting will be held at 6th Floor, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD on 28 February 2024 at 11.30 a.m.
The Resolution will be voted on by way of a poll. In accordance with the Articles, all Shareholders entitled to vote and who are present in person or by proxy at the General Meeting shall upon that poll have one vote in respect of every Ordinary Share held.
Recommendation
The Board considers that the Proposal is in the best interests of Shareholders as a whole and is unanimously recommending that Shareholders vote in favour of the Resolution to be proposed at the General Meeting.
Enquiries:
Chairman
T: 020 7416 7780
Hugh Aldous
Dickson Minto Advisers LLP
T: 020 7649 6823
Douglas Armstrong
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