Literacy Capital (BOOK) has announced, alongside its notice of its forthcoming AGM on 15 May, that it intends to propose a mechanism to return capital to shareholders through the issue and immediate redemption of bonus shares, known typically as B shares. This comes alongside a proposal to amend the AIFM Agreement, designed to ensure that the management fee fairly takes into account time spent managing capital which is subsequently returned to shareholders.
The board’s motivation for the issuance of redeemable B shares is to ensure that they have a prudent method to periodically return capital to shareholders. The scope and timing of B share returns, following any realisation in BOOK’s portfolio, will be conditional on BOOK’s liabilities at the time of return (including any outstanding borrowings), its pipeline of investment opportunities and outstanding investment commitments and general working capital requirements. The board notes that any net proceeds from realisation will be utilised for the repayment of any outstanding borrowings before it returns capital to shareholders via the B shares. The board also notes that the B shares will not limit its ability to return capital via other mechanisms.
The adjustments to the AIFM arrangement are designed to adjust the management fee to take into account any capital returns (possibly due to the proposed B share scheme or otherwise) during each financial year. This new fee will prevent BOOK’s management from effectively reducing their own fees when distributing capital form the portfolio, as any distribution would reduce the NAV used to calculate their fees. The adjustment would effectively upscale the NAV in a financial year when it is used to calculate fees, accounting for the impact of NAV reductions due to capital distributions. In the example given by the board, under the proposed setup, in a year in which BOOK reported a NAV of £300m and distributions of £20m made in the second quarter of the year, the NAV would be adjusted upward by £10m to £290m when calculating any management fees, to account for the distributed capital.