The SME Loan Fund is in discussions regarding proposals which it thinks, if implemented, should:
- address investors’ concerns regarding conflicts of interest between the Company, its current investment manager and its largest shareholder;
- provide the Company with access to a broader range of investment management skills through the appointment of SQN Capital Management, LLC (“SQN”) as the Company’s investment manager;
- enable the Company to continue to provide attractive returns to shareholders (an initial target annual dividend of 6.25p per share (increasing to at least 7.0p per share with effect from July 2018) and a target annual net asset value total return of at least 8%);
- continue to provide shareholders with the opportunity to vote on the Company’s future in the event of the Company’s shares trading at an average discount of more than 10% over any three-month period;
- diversify the Company’s shareholder base through a secondary placing of SMEF shares currently held by GLI Finance Limited (“GLIF”) and, as a result, improve the market liquidity in its shares;
- enhance the prospect of increasing the size of the Company through share issues in due course; and
- provide shareholders with an opportunity to vote on the continuation of the Company if it has not grown its net assets to more than £250 million by 31 December 2019.
NB: As part of these proposals, the Board is proposing scrapping the liquidity opportunity promised to shareholders. Shareholders should have been able to exit at a price close to asset value at the end of March 2017. There will be a continuation resolution (an ordinary resolution) if the Company’s net assets at 31 December 2019 are less than £250 million.
Placing of GLIF shares
GLIF has agreed to sell its c.48% holding in SMEF via a secondary placing, to be co-ordinated by Cantor Fitzgerald Europe, at 90p per share (the “Placing Price”). The Placing Price represents:
- a discount of 9.6% to SMEF’s net asset value per share as at 31 January 2017 (adjusted for the monthly dividend of 0.6p per share to be paid on 24 February 2017) of 99.61p per share; and
- a discount of 3.2% to SMEF’s closing share price of 93p on 20 February 2017.
SQN has indicated its intention to participate in the Secondary Placing up to an aggregate participation of £7.0 million.
Possible wind up
The Transfer of Management Services would be conditional on the Secondary Placing being completed. In the event that the Secondary Placing is not completed, the Directors intend to bring forward proposals for the orderly realisation of the Company’s investments and return of surplus capital to shareholders via mandatory redemptions. As at 31 January 2017:
- 39.3% of the Company’s portfolio was due to mature within six months, 43.1% (cumulative) within 12 months and 55.8% within 18 months; expire and
- the weighted average maturity date of the portfolio was 2.8 years.
Amberton considers that it would be possible to expedite an orderly realisation with secondary transaction in some of the Company’s investments. However, it could still; take a significant period of time to realise the Company’s portfolio in its entirety.
SQN proposed as new manager
If the Secondary Placing is completed, SQN will become SMEF’s investment manager. The SQN group, which is headquartered in New York City with operations in the UK, is an independent asset manager that specialises in alternative asset management and focuses on generating secured income through investment vehicles the performance of which is designed to be uncorrelated to traditional equity, debt, and commodity markets. SQN seeks to deliver its objectives through diversified investments in under-served segments of the market and/or in segments in which it has unique market access or structuring capability.
The SQN group currently provides investment advisory and portfolio management services in respect of assets with an aggregate value in excess of US$1 billion on behalf of two US-based private offerings, three public direct participation programs, a line of Cayman Island-based investment funds, separately-managed accounts and the London-listed SQN Asset Finance Income Fund Limited (“SAIF”). SAIF, a diversified equipment leasing and asset finance investment company, was launched in July 2014 and has raised £540 million, to date, through consistently oversubscribed share issues.
As the Company’s investment manager, SQN would be entitled to a management fee at a rate of 1.0% p.a. of SMEF’s net assets up to £250 million, 0.9% p.a. for net assets greater than £250 million and lower than or equal to £500 million and 0.8% p.a. for net assets greater than £500 million. In addition, SQN would be entitled to charge an additional structuring fee of up to 1.0% of the costs to the Company (ignoring gearing and transaction expenses) of acquiring each investment (excluding any investment acquired from SQN or the funds they manage). No performance fee would be payable by SMEF to SQN
New objective and approach
In the event that SQN becomes SMEF’s investment manager, SQN intends to appoint Amberton as its sub-investment adviser in relation to SMEF’s existing portfolio of loans. No termination fees would be payable by SMEF to Amberton as a consequence of Amberton ceasing to be SMEF’s investment manager.
Changes are planned to the Company’s investment policy, including:
removing any obligation on the Company to invest through SME loan origination platforms and SME finance companies in which GLIF holds strategic equity investments; and
focusing the Company’s investment strategy to concentrate on wholesale lending, trade and receivable finance and collateralised lending opportunities as either debt or structured notes including equity or equity participations.
SMEF : SQN mooted as manager of revamped SME Loan Fund