Paul Singer is the largest investor in Fondul Proprietatea, the largest closed-end fund in the world. During the last quarter, Elliot Associates increased its position in Fondul by 25%, bringing it from 15.2% to 19.7%. The fund just reported its highest profit ever at 48%, compared to 2013.
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Introduction to Fondul Proprietatea
The fund was created by the Romanian state to reimburse Romanian citizens for the assets that were confiscated by the Communist regime. Since 2010, the fund has been managed by Mark Mobius‘s Franklin Templeton, and since 2011, the fund has been listed on the Bucharest Stock Exchange.
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The fund´s NAV is $4.0 billion. The fund is 85% invested in Romanian energy companies. The fund is now trading at a NAV discount of 26%. Since the listing, the NAV discount has been narrowing. There are two main reasons for the NAV discount:
- Shares of Fondul Proprietatea were initially distributed to Romanian citizens. They have been gradually exiting from the fund, and foreigners are buying. The oversupply of shares is being eliminated, and this is reflected in narrowing the NAV discount.
- A substantial 49% of the portfolio is not listed.
Fondul Proprietatea – Textbook case of activism has been paying off
Paul Singer has a team of lawyers in Romania that pushes Templeton into concrete steps to create value and reduce the NAV discount. The unlisted portfolio has decreased by half during the last two years. The fund has just completed its fourth round of buybacks, in which it purchased 6.3% of its outstanding shares, and the fifth round is now underway.
In September 2014, shareholders led by Elliot agreed to extend the management contract for Templeton by an additional two years. The new contract includes criteria that have to be met for Templeton to continue managing the fund. The most important one is to decrease the NAV discount to 15% (from the current 26%) in two-thirds of trading sessions between Oct. 1, 2014 and June 30, 2015. Elliot proposed an amendment to the contract which stipulates that Templeton receives additional remuneration for cash distributions to shareholders.
All these activities are paying off. The fund just posted a record net profit of 228 million euros, up by 48% compared to 2013 when the company’s profit amounted to 151.1 million euros. Most of this profit came from dividends paid by companies in which FP holds stakes, as well as from the fund’s asset sales, which reached 240 million euros in 2014. The fund sold several significant stakes last year.
Fondul Proprietatea – How can activists unlock value?
The fund trades at a 26% discount. Similar funds trade at 3% to 5% discount. Templeton has been implementing concrete steps to narrow the discount to the targeted level, namely:
- Portfolio restructuring – As stated above, unlisted equities represent 49% of the portfolio. Elliot is working with Templeton on listing and exiting the unlisted positions.
The largest unlisted position is a stake in Hydroelectrica, which accounts for 16% of the NAV of the fund and 33% of the unlisted portfolio. The government plans to IPO Hydroelectrica in the first half of this year.
The other 25% of the unlisted portfolio is made up of five electricity distribution companies that are majority-owned by ENEL. ENEL recently announced it is exiting Romania as part of a restructuring move to reduce leverage. Fondul Proprietatea plans to exit too. In two companies, Fondul Proprietatea has tag-along rights; in the other three companies, Fondul has retained advisors to facilitate the transactions.
The other 22% of the unlisted portfolio represents electricity distribution companies that are majority owned by E.ON and Electrica, a local power producer. Fondul Proprietatea is negotiating an exit with both majority owners.
During the November investor day, representatives for Templeton repeatedly stated that they believe Fondul Proprietatea will significantly reduce its exposure to electricity distribution companies during 2015. Further, it is expected that the valuations in sales to strategic investors should be above the current valuations of those positions.
- Active buybacks – The fund has just completed its fourth round of buybacks in which it purchased 6.3% of its outstanding shares. The buyback was done in a tender offer in which the fund bought 7.4% of shares from each investor at a 20% premium to the market price. A similar tender offer will most likely happen next year. On Dec. 8, the fund will start its fifth round of buybacks in which it will be buying 25% of daily share volumes.
- High dividends – the fund called an AGM for January in which it proposes a 0.05 dividend (6% dividend yield).
- London listing early next year – to broaden the investor universe, Templeton is making steps to list the fund on the LSE. The listing is planned for the first quarter of this year.
These other factors are also favorable for Fondul Proprietatea’s performance:
The Romanian economy is strong – the fund owns only energy companies. Energy companies are a proxy for the Romanian economy. Romania was one of the best-performing EU countries, growing at 3.5% in 2013. In 2014, the good macro situation was reflected in the performance of the companies in Fondul Proprietatea’s portfolio, causing Fondul to report the best dividend income ever.
Romanian equities are cheap – Romania now trades at around PE 9, while Poland, Hungary or Czech Republic equities trade at around 21-23. The macro situation is improving, and the political situation is stabilizing.
The recent 10% share price drop creates an interesting entry price. Fondul Proprietatea’s share price has gone down by 10% in recent weeks. The weakness was caused by concerns over the share price drop in OMV Petrom, an oil and gas exploration company. The concerns are overdone – the drop in OMV Petrom’s share price was outweighed by an increase in the value of other companies in Fondul’s portfolio – the total NAV increased in December.
Since listing in 2011, the NAV increased by 40% (including dividends), and the share price has increased by 85%. Paul Singer and other activist funds are pushing Tempelton to implement all the right steps to narrow the NAV discount further. Singer is increasing his stake in Fondul Proprietatea aggressively, indicating that he believes the trend should continue. Templeton’s actions indicate the chances are good. Stay put for another profitable year.
Full disclosure: The author of this article has a long position in Fondul Proprietatea