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JPMorgan UK Smaller Companies Investment Trust (JMI) has announced that it has signed terms with the JPMorgan Mid Cap Investment Trust (JMF) in respect of a proposed combination. This would see the issuance of new ordinary shares of JMI and the transfer of part of JMF’s assets. Following its completion, the enlarged JMI shall continue to be managed by JPMorgan Funds Limited, with Georgina Brittain and Katen Patel as lead portfolio managers, with the company pursuing its existing investment objective and policy.
QD comment AC : “Given the ongoing struggles in the small and medium sized companies space over the last few years, it is not overly surprising to see more consolidation occurring in the sector, particularly as we have seen the market caps of both funds sink below £200m. The funds also make natural bedfellows given the overall management of JPMorgan, which should limit the costs of the transaction (particularly as they are waiving fees). While it is a shame to see the investment trust universe shrink further due to current macro headwinds and ongoing cost disclose issues, this announcement does appear to make sense, providing an even more stable platform to drive long term returns in the increasingly attractive UK small and mid-cap market. With increased dividends, lower management fees, and a broader asset base, the move looks like a net positive for investors (which unfortunately has not been a given following some of the previously announced investment trust combinations), particularly given JMI’s stable performance ahead of benchmark over the last few years. The move also now differentiates JMI from The Mercantile Investment Trust. One potential downside is that they are likely going to apply a market cap (liquidity) cut off for the smaller stocks, locking the combined fund out of that space – which they’ll regret if smaller small-cap ever recover – not that there’s any sign of that”
The board believes the transaction will enable JMI’s existing ordinary shareholders to benefit from continued exposure to the UK Smaller companies investment strategy, the greater economies of scale that are expected to result from the enlarged asset base, including cost efficiencies and greater liquidity in JMI’s ordinary shares.
As part of the Transaction, the board has also agreed on the following changes:
The documentation in connection with the Transaction is expected to be published in January 2024 with a view to convening EGMs and completing the Transaction in February 2024.
Commenting on the announcement chairman of JMI, Andrew Impey, noted:
“Your board believes that there is a strong case for long-term investment in UK smaller companies. The valuations are attractive in absolute and relative terms, the outlook remains favourable, despite some near term challenges, and the company provides access to investments in a controlled risk environment that individual investors would find difficult to replicate on their own. The company’s NAV total return has outperformed the benchmark over one, three, five and ten years.
The proposed combination with JPMorgan Mid Cap Investment Trust plc will enhance this opportunity and create a larger, more liquid investment trust but still allow both sets of shareholders to benefit from JPMorgan’s expertise and track record in investing in this exciting area of the UK market. Both boards believe that shareholders will benefit from the reduction in costs, contributing to the good potential for capital growth, and the new enhanced dividend policy, which will allow them to benefit from an attractive yield.”
More details of the scheme are outline below:
Summary of the Scheme
The Transaction will be effected by way of a scheme of reconstruction of JMF under section 110 of the Insolvency Act 1986, resulting in the voluntary liquidation of JMF and the transfer of part of JMF’s assets to JMI in exchange for the issue of new ordinary shares of JMI to existing JMF shareholders. The number of New Ordinary Shares issued to JMF Shareholders will be determined on a formula asset value (“FAV”) for FAV basis. The FAVs shall be calculated based on the net asset value of each of JMI and JMF on an agreed calculation date, less each party’s transaction costs.
Subject to, and conditional on, the Scheme becoming unconditional in all material respects and the Transaction completing successfully, JMF Shareholders will have the option to elect to receive a cash distribution (the “JMF Cash Option”) which, on an aggregate basis will be limited to 15 per cent. of the JMF ordinary shares in issue (excluding treasury shares). Should total elections for the JMF Cash Option exceed 15 per cent. of JMF’s shares in issue (excluding treasury shares), excess elections for the JMF Cash Option will be scaled back into New JMI Ordinary Shares on a pro rata basis.
The Cash Option will be offered at a discount of 2 per cent. to the JMF FAV (the “Cash Discount”) less the costs of realising the assets allocated to the cash pool. The Cash Discount will be for the benefit of the enlarged JMI.
The assets subject to the Cash Option will be segregated from, and treated as separate to, the assets to be transferred to JMI pursuant to the Scheme.
Benefits of the Scheme
The board of directors of both JMI and JMF believe that the Scheme has a strong rationale, which includes the following benefits:
Costs of the Transaction
Each company will bear its own costs in respect of the Transaction which will be reflected in the FAV for each company
For the avoidance of doubt, any costs of realignment or realisation of the JMF portfolio prior to the Scheme becoming effective, any stamp duty, stamp duty reserve tax or other transaction tax, or investment costs incurred by JMI for the acquisition of the JMF portfolio or the deployment of the cash therein upon receipt shall be borne by the enlarged JMI, including the London Stock Exchange admission fees.
JPMorgan Cost Contribution
JPMorgan has proposed a contribution to the costs of the Transaction in the form of a fee waiver, being six months of the New Management Fee payable by the enlarged JMI in respect of the net asset value of the assets transferred from JMF to JMI under the Scheme (“Cost Contribution”).
The net asset value of the assets transferred under the Scheme are currently estimated to be approximately £208 million[2].
The Cost Contribution will be for the benefit of the shareholders of the enlarged JMI.
Expected timetable
It is intended that the documentation in connection with the Transaction will be posted to shareholders in January 2024, with a view to convening general meetings in February 2024. The latest date for the Scheme to be determined to be unconditional is 31 March 2024, unless extended by mutual agreement of JMI and JMF.
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an informative piece.Very useful