Impax Environmental Markets (IEM) is following Herald (HRI) in launching a 100% tender offer in a bid to extricate itself from Saba Capital. The activist hedge fund has built a 20.7%, or £189m, stake in the £763m investment trust and its board fears it is trying to gain control.

The exit opportunity, which IEM calls a continuation tender offer, is available to all shareholders. It requires a special resolution next month backed by 75% of voting shareholders, which means it will fail if Saba does not support it.

IEM chair Glen Suarez said Saba had indicated it would oppose the resolution. He said if it did, or if it did not tender all its shares, the tender offer would not proceed. In that case, the company, which passed a continuation ballot last year with 89.6% of shareholder votes, would instead propose a second, backup exit tender offer. As with Herald’s proposal last week, this would be implemented by an ordinary resolution requiring 50% of votes, making it more likely to pass.

Suarez explained that this would enable shareholders to get out of the listed fund if it appeared the US investment firm founded by Boaz Weinstein was poised to take it over.

“The exit tender offer is being put in place as a contingency in the event the continuation tender offer does not proceed, to give shareholders the chance, if approved, to realise as much of their investment as they wish and to protect them from becoming inadvertently trapped in a Saba-controlled vehicle,” said Suarez.

Shares in Impax Environmental Markets rose over 4%, or 17p to 424p narrowing their 9% discount to net asset value (NAV).

Following the wind-down of rival trusts run by Jupiter and Menhaden, IEM is the UK’s only listed fund with an environmental solutions remit. However, the mid-cap portfolio has struggled since late 2021 when higher inflation and interest rates knocked growth-style investing and a backlash, particularly in the US, against funds with environmental or social goals hurt sentiment.

Over five years the shares have shed 6%, despite the evident value in a portfolio of companies growing profits from providing mitigations, if not solutions, to the climate crisis. In October Impax Asset Management reshuffled the trust’s investment team, appointing Sanjeev Lakhani as a new co-manager to replace Jon Forster who stepped back into the role of senior industrials analyst.

To prevent the share price discount widening too far, the company bought back £189m, or 20.6%, of its shares last year. 

In response to the board’s attempt today to save IEM for long-term shareholders, Impax Asset Management said the portfolio remained a highly attractive proposition.

“The portfolio offers shareholders a compelling mix of high growth, attractive valuations and differentiation against an increasingly concentrated equity market. Recent changes have led to a more consolidated portfolio, underpinned by structural long-term growth trends including electrification, digitalisation and infrastructure resilience against climate change. These have been underappreciated by markets of late but offer some of today’s most exciting and undervalued opportunities – with high quality stocks trading at some of their lowest relative valuations in decades,” the fund manager said.

Board “cannot stand by”

In his stock exchange statement Suarez said: “After exhausting every reasonable alternative to protect our shareholders, the board has been left with no choice but to propose the continuation tender offer, contingent upon Saba’s full participation, in response to Saba’s relentless pursuit of short-term objectives at the expense of IEM and the wider UK investment trust sector.”

He added: “The board cannot stand by while Saba’s actions create an environment of uncertainty and risk for all our shareholders. The continuation tender offer proposed today is designed to provide shareholders with the choice to exit at close to NAV if they have a short-term investment horizon, or to remain invested in IEM and benefit from the long-term growth prospects of an environmental markets strategy, once Saba’s destabilising influence has been removed.

“If Saba blocks this effort by refusing to tender the shares to which it is beneficially entitled, its motive for control will be revealed and the board will propose the exit tender offer to enable shareholders to exit the company and avoid the risk of being trapped in a changed strategy that no longer represents their chosen investment strategy or objectives.”

IEM’s defensive move comes as Edinburgh Worldwide (EWI), a global smaller companies trust run by Baillie Gifford, rallies its shareholders to a second vote in a year against Saba. The hedge fund hopes to use its 30.7% stake to oust the board next Tuesday, a move that EWI is urging other shareholders to oppose, saying Saba wants to take control of a portfolio that has a valuable 16% weighting in Elon Musk’s rocket company SpaceX.

Our view

James Carthew, head of investment companies research at QuotedData, said: “The approach taken by Herald and now Impax Environmental looks complicated but essentially they are saying to Saba: ‘Do you want an exit on the best available terms or is your real goal seizing control of the trust? If it’s the latter, we are going to make sure other investors aren’t trapped.’ The backstop/exit tenders let everyone else leave and Saba gets stuck with the most illiquid investments and perhaps a trust it owns close to 100% – which would fail the free float test, so it would lose investment trust status. There is another point to make here. If Saba is angling to seize control, it feels to me as though this is evidence that it is acting in its interests not those of its own investors. Why would those investors put up with that behaviour?”

Senior analyst Matthew Read added: “IEM’s proposed solution to its Saba problem mirrors that recently announced by Herald – a 100% tender which will be cancelled if Saba does not exit, and replaced with another 100% tender where shareholders will have the knowledge that, if they do not exit, they will likely be trapped in a vehicle controlled by Saba. Another strong similarity between HRI and IEM is that Saba has bought big positions in both at tight discounts, and premiums in HRI’s case. This does not make sense if your primary objective is to profit from discount narrowing but would make sense if the objective is to harvest assets under management and earn fees on this over the longer term. If so, we think Saba’s own shareholders should be aggrieved as it is effectively using their money to finance its own ambitions.”