abrdn Diversified Income and Growth has announced the outcome of the strategic review process that started on 20 June 2023.
Outcome of the strategic review
As noted at the outset of the strategic review, the board has been encouraged that, in exceptionally volatile markets, Nalaka De Silva and the wider investment team have continued to deliver steady performance under the existing investment strategy adopted in 2020. The review was prompted by the wide and persistent discount.
Selling off the private market investments in current market conditions would necessitate accepting a substantial discount to their long term realisable values, and thereby limit the value that could be achieved for shareholders. Accordingly, the board has sought to avoid an outcome of the strategic review that would require material realisations of private market investments in the current market environment.
The board ultimately concluded that none of the third party proposals for mergers etc put forward would optimise shareholder value at this time, and determined that shareholder interests would be better served over the near to medium term by realising value from the existing investment strategy and portfolio.
The board has decided that it is in the best interests of its shareholders to carry on with the existing investment strategy. It believes that it can close the discount by means of enhanced distributions, funded by both realised gains and surplus available cash, through a combination of special dividends and a tender offer. In total, they expect to return between £30m and £35m to shareholders by the end of 2024. Further enhanced returns of value, including special dividends, are envisaged during 2025 and 2026 as a substantial part of the company’s private markets portfolio matures.
Special interim dividend
The board is declaring a special interim dividend of 1.65p (amounting to c.£5m in aggregate), following gains realised from the private markets portfolio over recent months. The special dividend will be paid on 1 December 2023 to shareholders on the register on 3 November 2023.
Tender Offer
A tender offer of between £25m and £30m, at an expected discount of about 15% to NAV, will also be offered to all shareholders during 2024 subject to the passing of the continuation vote at the AGM in February 2024. Full details of the tender offer, which also requires shareholder approval, will be set out in a circular to be published in 2024.
Ongoing assessment of strategic options
About a third of the portfolio, comprising existing private market investments, is expected to mature by the end of 2026. At that time, the board will look at the progress it has made in narrowing the discount and then consider its options which could include further enhanced distributions.
Investment objective, policy and strategy
The investment objective remains to seek to provide income and capital appreciation over the long term through investment in a globally diversified multi-asset portfolio. The board continues to have confidence in the Investment Manager’s strategy in pursuance of this objective and there are no plans to amend the investment objective and policy at this time.
Portfolio modification
Going forward, the manager notes that the company will seek exposure to alternative asset classes primarily through private investments rather than listed funds. In the light of the enhanced distribution programme and as the existing private market investments mature (and undrawn commitments reduce), it is expected that the private market investments will represent a higher proportion of the portfolio.
Additional disclosures on valuations
The manager notes that the high level of valuation uncertainty in the current market is attributable to a range of factors including high inflation, rising interest rates, deglobalisation and escalating geopolitical tension. This uncertainty results in higher cost of capital, lower real growth and volatile capital markets. As a result, the manager believes that investors remain cautious and are currently positioning themselves in cash and cash equivalents until market conditions become more settled.
58.5% of the existing portfolio is invested in private markets with the balance being held in listed investments and bonds (as at 30 September 2023). The manager believes that ADIG’s listed and private portfolio has a much greater intrinsic value than that currently reflected in the share price. This value can be assessed on an asset’s financial performance, growth prospects and risk characteristics. Going forward, the manager will provide additional disclosures on the investments within the portfolio to provide the market with a greater ability to understand this intrinsic value and reduce the impact of short term price fluctuations influenced by near term market forces.
Investment outlook
In the present market environment, abrdn believes that investing in both public and private markets presents excellent opportunities for carefully chosen investments. In particular, the manager believes that ADIG is well positioned to benefit from newly arising opportunities that could generate Net IRRs* of 10-15%. Such opportunities include both new sectors, such as green infrastructure, and opportunities to provide capital where traditional providers have stepped back, such as private credit. The manager will continue to make new investments provided that it is satisfied that such investments offer a compelling investment opportunity.
[Barring a bid close to NAV, this was probably the best outcome for shareholders. It feels a lot like adopting a managed wind down process but with a pause built in to see if sentiment towards the investment proposition has changed.]
ADIG : abrdn Diversified Income and Growth will plow on