The board of Hipgnosis Songs Fund (SONG) has reported an error made due to the double counting of accrued revenue in the calculation of operative NAV by Hipgnosis Song Management Limited, the trust’s adviser. This error results in a 7.6% reduction in the pro forma operative NAV per ordinary share from $1.1657 (92.08p) as stated on 4 March 2024 to $1.0765 (85.03p). This reduces the operative NAV from $1.4bn to $1.3bn.
The discovery of this error was the result of the revaluation of the company by Shot Tower, its recently appointed valuer, who reported a new NAV on 4 March. The error relates to the adjustment made to the IFRS NAV to produce the operative NAV, which is prepared by the investment adviser, and does not relate to the valuation methodology used by SONG’s valuer. The adviser had previously double counted the accrued revenue when converting the IFRS NAV to the operative NAV, inflating the operative NAV which is used for SONG’s published NAV.
Importantly, the board has previously raised concerns with the investment adviser on the double counting of accrued revenue. The investment adviser has now notified the board that they agree with the board’s view, contrary to previous advice. One major implication of the previously higher NAV is that SONG has almost certainly been overcharged investment advisory fees by the investment adviser.
QD comment: [“It’s hard to imagine the SONG story could get any worse, but today’s news has challenged that idea. Double counting revenue when calculating the NAV is a huge issue. This error opens up a series of questions: where does the fault lie – was it a mistake by the management team? why did the auditor not spot this? does some fault lie with the board’s audit committee? if the issue had been raised previously, why weren’t shareholders made aware of this? were the advisers claiming inflated management fees? We can easily envisage a new class action by shareholders who have been misled about the NAV and have been overpaying for shares. This overstated NAV will also likely complicate any discussions around takeovers, as it adds even more doubt when determining the true value of SONG’s assets.”]