Dunedin Enterprise (DNE) has announced its annual results for the year ended 31 December 2023, during which it provided NAV and share price total returns of 3.6% and 8.6% respectively, and finished the year trading at a share price discount to NAV of 18.3%. In May 2016, shareholders approved a managed wind down of the trust although this process effectively started in 2011 when shareholders approved a new policy to distribute the proceeds of all realisations to shareholders. Some 13 years later and this process is finally showing signs of coming to an end.
It is worth noting that, since 2012, DNE has distributed £203.5m to its shareholders, reducing the net asset value of the trust to £34.4m at the end of 2023. Since May 2016, DNE has provided NAV and share price total returns of 165.1% and 266.3% respectively, which far outstrip the returns on the returns of the FTSE Small Cap and the FTSE All-Share Indices, which its chairman, Duncan Bridge, says have returned 59.5% and 60.7% over the same. [QD comment: this is perhaps a timely reminder of the sort of outperformance that can be achieved by going through the process of winding down a portfolio of illiquid assets when, in the initial stages, such assets are not in favour generally.]
Time to turn off the tenders?
Following a period in which capital returns were made to shareholders (to the extent that the capital reserve allowed), DNE has, for a number of years, used tender offers to make returns to shareholders. Tenders have been used as the board considered this to be the most efficient and cost-effective approach – the most recent tender offer, executed in 2022, distributed £41m to shareholders.
DNE now has total net assets of £34.4m, comprising primarily an investment portfolio of £7.5m and cash (or equivalents) amounting to £26.5m. It has outstanding commitments to funds in which it is an investor of £7.6m. The board says that, in light of this, it is considering what will be the optimum way of returning further value to shareholders. One option is to put the trust into members’ voluntary liquidation, as was flagged in November last year when the investment in Premier Hytemp was sold (you can read about this here). However, this would result in the loss of the trust’s listed status and the board says it recognises the value that shareholders place on the flexibility of maintaining this. It has therefore decided to keep this option closely under review while it seeks to sell as many of DNE’s remaining investments as possible – the trust only has five underlying portfolio company investments remaining.
The board says that it is conscious that tenders tend to be relatively expensive to execute, particularly for smaller amounts of capital, and that many individual shareholders (who constitute either directly or indirectly a large proportion of DNE’s share register) tend not to participate in tenders. It may also be the case that those shareholders who hold their shares through ISAs or other vehicles may encounter problems with continuing to hold their shares in this way once DNE loses its listed status following the start of the liquidation process. The board says that it is continuing to work closely with its advisers on the options available and the optimum timing and will keep shareholders closely informed about its future plans once these become more certain.
Cash, commitments & liquidity
The original investment periods of all limited partnership funds to which DNE made a commitment have now ended and, in the future, DNE is only required to meet drawdowns for follow-on investments, management fees and expenses during the remainder of the life of these funds. As at 31 December 2023, DNE held cash and near cash equivalents amounting to £26.5m and also had outstanding commitments to limited partnership funds of £7.6m, consisting of £6.9m to Dunedin Buyout Fund III and £0.7m to Realza.
Dividends
An interim dividend of 10.0p was paid in January 2024. There is no final dividend being proposed.
Portfolio
During the year a total of £10.5m was realised from the investment portfolio. The realisations of Premier Hytemp, the manufacturer and supplier of engineered metal products, and Weldex, the crawler crane hire business, generated proceeds of £5.0m and £4.6m respectively. The earn-out from RED, the provider of SAP contract and permanent staff, generated proceeds of £4.6m. A sale of the roll-over investment in Hawksford, the provider of investment related services, generated proceeds of £0.7m.
Unrealised valuation increases of £1.1m were offset by decreases of £1.3m. A valuation uplift was achieved at EV, offset by a reduction in the valuation of FRA. The realisation of all investments in Dunedin Buyout Fund II, means that DNE only has two investments remaining: Dunedin Buyout Fund III and Realza with only five underlying portfolio companies.
Valuation movements
In the year to 31 December 2023 valuation uplifts amounted to £1.1m, the majority of which was generated by EV, the provider of high-performance video cameras and other visualisation technology used in the oil and gas industry. DNE says that EV’s ‘maintainable EBITDA’ has increased by 24% in the year, which follows a sustained increase in the oil price. There was also a release of the provision for carried interest in Dunedin Buyout Fund III LP amounting to £0.4m. During the year there was a valuation reduction of £1.3m at FRA, the forensic accounting, data analytics and e-discovery business. DNE says that, in line with many professional service firms trading, FRA has not progressed as expected. It says that, with staffing levels maintained to accommodate future growth, ‘maintainable EBITDA’ decreased in the year.