Alternative Liquidity discount narrows – At the start of the year (1 July 2016) Alternative Liquidity Fund had a Net Asset Value of $127.5 million and a NAV per share of US$0.8728. At the end of the year the NAV was US$111.1 million and the NAV per share was US$0.7574. This represents a 13.2% (US$16.4 million) drop in value over the year, with US$0.10 (approximately US$14.7 million) attributable to cash distributions via the B share issuances. The main reasons why the underlying NAV declined were, in order of magnitude: Abax Arhat, US$5.9 million; Vision US$1.8 million (a combination of currency and provision for farm funds); 3DProp Co, US$0.8 million; and South Asian Real Estate Ltd, US$0.3 million.
The share price climbed from 13.75 cents to 20.5 cents as the discount narrowed from 84.2% to 72.9%.
Twelve funds make up over 91% of the portfolio, however they are managed by only nine separate management companies. Almost the entire portfolio (98%) is made of assets domiciled in emerging markets. Approximately 50% of the portfolio can be deemed credit; almost 40% real estate; with the balance in equity positions and cash.
The Company’s largest exposure is to the Vision Brazil funds (49% of NAV), which are made up of three separate pools of legal claims against both State Governments and the public utility firm Eletrobras. All the claims require novation in the local courts and given the current difficult economic climate in Brazil along with a very cumbersome judicial process, shareholder liquidity from these pools has been scarce. Additionally the Vision funds have exposure to some farmland assets which are caught up in very complicated legal proceedings mainly surrounding their ownership and clean title. Given the state of the law suits and the likelihood of recovery, a reserve equivalent to 45% of NAV was applied to these holdings in September 2016.
The second largest exposure is to Ukrainian real estate (19%), being mainly a large residential apartment complex development in Nikolaev. The geopolitical and macro-economic environment severely impact this project, however, it is progressing, albeit slowly, and apartments are being sold and the cash re-invested to complete the project. The investment manager has simplified the holding structure for this position over the past twelve months, a process that is almost complete. This will have material cost benefits to the company’s shareholders.
ABAX Arhat is the third largest holding (5%). The portfolio comprises four main positions in debt and private equity of Chinese companies. The two largest positions are companies trying to execute reverse mergers and subsequently relist on the A-share market. ABAX shareholders were approached in the fourth quarter with a secondary bid, however, this required 75% shareholder approval and the offer/sale was not approved. Subsequently the ABAX NAV was adjusted negatively by approximately 30% by their valuation agent, Houlihan Lokey. Following that the same secondary buyer (with help from the manager) proposed a slightly modified bid and approximately 25% of shareholders sold their position.
During the year, Alternative Liquidity Fund received approximately $15.4 million in distributions from underlying investments, realised gains of US$0.38 million have been recognised. Amongst these distributions were inflows from GML/Growth Premier, which crystallised approximately 70% of their positions at NAV to distribute a total of US$12.3 million in two separate payments; GLG EM Growth, which paid out US$0.8 million, US$0.8 million from Trafalgar, SFL Clover US$0.4 million, Serengeti US$0.2 million, Clearwater Capital Partners, US$0.1 million, Apollo Asia US$0.1 million and Vision ELT US$0.1 million.
The board approved three B share issuances: September 2016, December 2016 and June 2017. The total cash distributed to shareholders via these issuances was approximately $14.7 million equivalent to US$0.10 a share. At year end they held US$4.3 million in cash. Fund liabilities and accrued expenses at the year end totalled US$0.4 million, leaving the fund with net cash of US$3.9 million before 3rd quarter expenses. The investment manager will recommend another B share issue/distribution if they receive a material distribution from the portfolio in the near future.
ALF : Alternative Liquidity discount narrows