Atlantis Japan Growth (AJG) and Nippon Active Value (NAVF) have both announced this morning that their boards have agreed heads of terms for a proposed merger of the two trusts with AJG rolling over into NAVF. Similarly to the abrdn Japan (AJIT) scheme, which is already underway, the transaction would result in a larger company with more shareholders and greater assets, which should both result in greater liquidity for all shareholders and lower the ongoing charges for all by spreading the fixed costs of the combined company over a larger pool of assets. It is also expected that an inflow of capital into the NAVF portfolio will enhance its ability to discover undervalued Japanese listed companies and enable active engagement to deliver returns for shareholders.
AJG’s board says that it has been actively reviewing options to address the relative small size of the company, which has been driven in part by the market rotation away from the growth investment style and recent disappointing relative performance. These issues have made it difficult to attract significant demand for AJG’s shares and, absent any action, the discount at which the shares trade to net asset value is likely to persist in its view.
NAVF is a UK investment trust which targets attractive capital growth for its shareholders through the active management of a focused portfolio of quoted companies which have the majority of their operations in, or revenue derived from, Japan, and that have been identified by NAVF’s investment adviser, Rising Sun Management Limited, as being undervalued.
The proposal provides AJG’s shareholders with access to a focused and differentiated investment opportunity with a strong track record, a partial cash exit option and a larger continuing investment trust with the prospect of improved liquidity. The proposals require approval by each company’s shareholders and, if approved, will be implemented through a scheme of reconstruction and members’ voluntary liquidation of AJG.
Key benefits of the proposals
AJG’s board has laid out the following key benefits from the proposals:
- NAVF’s active management approach, which differentiates it from many of its peers, focuses on unlocking value in cash-rich smaller Japanese companies, an approach which is aligned with recent developments in Japanese corporate governance and with NAVF’s structure as a listed UK investment trust. The highly selective portfolio of NAVF offers investors a high-conviction, uncorrelated opportunity.
- Since the date of its IPO (21 February 2020), NAVF has been the top performing Japanese investment trust over the period to 9 August 2023, having delivered a NAV total return of 45.6% in sterling terms.
- Although NAVF has only been in existence for a little over three years, members of its investment adviser’s team have a track record of over 30 years of investing in Japan, pursuing an activist strategy in recent years.
- NAVF has access to the Tokyo based research team of its investment adviser’s affiliate, Dalton Investments LLC, and corporate legal expertise based in Japan. NAVF also benefits from the potential to have other clients of Dalton Investments LLC invest alongside it, which provides the opportunity to take more meaningful stakes in companies and have more effective conversations with investee company management.
- As announced on 18 May 2023 in connection with the proposed combination of abrdn Japan Investment Trust plc and NAVF (the “AJIT Combination”), NAVF has undertaken to move to a premium listing on the Main Market of the London Stock Exchange, which is expected to complete prior to completion of the proposal and the AJIT combination and improve the access of retail investors to the enlarged NAVF and therefore its share rating and liquidity. The proposal is not conditional upon the AJIT combination.
- NAVF also intends to implement the proposal under the same prospectus to be issued by NAVF in connection with the AJIT combination, which is expected to reduce the costs of the proposed combination.
- Rising Sun has offered to underwrite the company’s costs of the proposed merger up to £800,000 including advisory and termination fees and associated VAT.
- The proposal will result in an inflow of capital into the NAVF portfolio which can be deployed at an advantageous time in the cycle, when recent government reforms support, more than ever in NAVF’s view, the strategy of finding undervalued Japanese listed companies and actively engaging with them to deliver returns for shareholders.
- The combination with NAVF is expected to improve the enlarged fund’s liquidity for all shareholders as well as spreading the fixed costs of NAVF, as the continuing entity, over a larger pool of assets. The ongoing costs ratio of NAVF, as enlarged by implementation of the proposal and the AJIT combination, are anticipated to be significantly less than that of AJGF as currently constituted.
- The proposal includes a cash exit opportunity of up to 25 per cent. of the company’s shares in issue, providing shareholders with the ability to realise part (or potentially all) of their investment at a 2% discount to formula asset value (“FAV”) per ordinary share.
Background to the proposals
While AJG’s board believes that its strategy remains attractive in the longer term, it is aware that the company’s small size and recent poor performance, both relative and absolute, make it difficult to attract significant demand for its shares, and that the discount at which the shares trade to net asset value is likely to persist. The board is also conscious that the continuation vote at the forthcoming annual general meeting is a significant hurdle to the company continuing unchanged.
Accordingly, the board has been reviewing alternative options for the company’s future, including combinations with other closed-ended funds, a change of manager and a solvent liquidation with no rollover option. In conducting its review, the board took account of the attractive opportunities in Japanese equities and the fact that many of the company’s investors are long term supporters of the listed investment fund structure and concluded that a rollover into an investment trust or similar vehicle was appropriate. Furthermore, the board wished to see an appropriate cash exit opportunity being available to shareholders as well as ongoing liquidity in, and demand for, the rollover vehicle’s shares. The board says that it has maintained dialogue with major shareholders on the future of the company over the last twelve months.
The board considers that taking advantage of the ongoing reforms and improvements in corporate governance to invest in undervalued Japanese listed companies and actively engage with them to deliver returns for shareholders, is an attractive strategy. The strategy has delivered strong returns in recent years, and in the board’s view can be expected to continue to do so. The board believes that combining AJG with NAVF provides an opportunity for AJG’s shareholders to continue with an attractive ongoing exposure to Japanese equities in an investment trust structure alongside an option to elect for a cash exit at a modest discount to NAV in respect of at least 25 per cent. of their holdings.
Merger to complete on an FAV basis
New NAVF shares issued to the company’s shareholders will be issued on a FAV-to-FAV basis. FAVs will be calculated using the respective net asset values of each company, adjusted for (i) the costs payable by the relevant company in relation to the proposal, (ii) any dividends and distributions declared by each company which have a record date prior to the effective date of the combination, and (iii) in the case of AJGF, less the amount reserved by the liquidator to provide for known and unknown liabilities. The AJGF FAV per share in respect of the rollover pool shall be increased by the amount equivalent to the 2% discount applied to the AJGF FAV per share in respect of the cash option.
AJG’s board believes it is appropriate to offer its shareholders the opportunity to realise part, or potentially all, of their investment in the company via a cash exit for up to 25% of the company’s shares in issue, at a 2% discount to FAV per share of the company. The discount applied to the cash exit FAV will benefit the FAV of AJGF shares electing, or deemed to have elected, to rollover.
Shareholders may elect for more or less than their pro rata entitlement to the cash option however, excess applications for the cash option over 25 per cent. of the company’s issued share capital will be scaled back pro rata to such excess applications.
The combination with NAVF is expected to improve the enlarged fund’s liquidity for all shareholders as well as spreading the fixed costs of NAVF, as the continuing entity, over a larger pool of assets.
Following completion of the proposal, it is expected that a director from the board of the company will join the board of NAVF.
Management cost contribution
Rising Sun, the investment adviser to NAVF, has demonstrated its conviction in the combined fund by offering to pay for AJG’s costs of implementing the proposal up to £800,000. The board welcomes this contribution and notes the strong indication it gives of Rising Sun’s commitment to the proposal and the enlarged NAVF.
Annual report and accounts and AGM for AJG
AJG’s board expects that it will publish its annual report and accounts for the year to 30 April 2023 and the notice of the AGM to be held in December as usual in the coming weeks. The board intends that the extraordinary general meeting required to implement the proposal will be held before planned the AGM, such that (assuming the proposal is approved) the company will be in liquidation by the date of the AGM, and the AGM may therefore be adjourned sine die. If the proposal is not approved, the AGM will be held as planned and the scheduled continuation vote will be put to shareholders.
Comments from Noel Lamb, chairman of Atlantis Japan Growth
“Style rotation, recent poor performance and reduced liquidity have led the Board to review alternative options and take market soundings. The investment adviser, Atlantis Investment Research Corporation has given the fund great service over many years. Looking ahead, this proposal to rollover into Nippon Active Value Fund with an option for a 25 per cent. cash exit, will provide investors with increased liquidity and access to a manager with a proven record. I commend it to our shareholders.”
Comments from Rosemary Morgan, chair of Nippon Active Value Fund
“We are pleased to have reached agreement with AJGF’s Board in relation to the proposed combination. The proposed transaction will offer AJGF shareholders the opportunity to continue to have exposure to Japanese equities but now with the active management approach which provides the potential to unlock greater value in the Japanese market, whilst being part of a larger vehicle. We look forward to the transaction progressing and welcoming the AJGF shareholders to our company together with the AJIT shareholders, subject to successful completion.”
[QD comment: Assuming that the merger proceeds as proposed, this should benefit both sets of shareholders as all will be invested in a larger, more liquid and efficient fund. At the margin, existing NAVF shareholders should also benefit from the larger fund’s greater firepower – allowing it to take larger stakes in the companies that it targets, or to spread the risk over a greater number of investments. If they so choose, AJG shareholders are able to get up to 25% of their investment back at a 2% discount to NAV, while also swapping their investment from a strategy that is currently trading at a round a 15% discount to one trading very close to par. AJG shareholders are also getting access to the strategy that is currently the best-performing within the peer group, by some margin.]