I commented on the results of ProVen VCT before their AGM on my blog. I said: “Total return to shareholders was 10.3% last year, but the fund manager did even better. Of the overall profits of the company of £18.6 million, they received £7.7 million in management fees (i.e. they received 41% of the profits this year). That includes £5.6 million in performance fees. Studying the management fee (base 2.0%) and the performance fee, I find the latter particularly incomprehensible. I will therefore be attending the AGM on the 3rd July to ask some pointed questions and I would encourage other shareholders to do the same. I am likely to vote against all the directors at this company”.
I did attend the AGM on the 3rd July in London, but so far as I could tell there were only two other ordinary shareholders present. No presentations and it was a hot day in London that might have deterred some from attending. In essence picking a summer day for an AGM and not providing any special reason for them to attend is a good way to put off shareholders from doing so.
But I did meet with the Chairman, Neal Ransome, and two representatives of the fund manager before the AGM commenced to go through the performance fee figures. The performance incentive fees are based on a very complex calculation which is essentially based on the growth in net assets of the fund plus dividends paid out, i.e. on Total Return. The manager gets 20% of any excess over a hurdle rate. The hurdle rate is the higher of a 25% uplift on initial net asset value or the initial net asset value compounded by base rate plus 1% per annum. That is on top of a “base” fee of 2.0% of net assets per annum payable to fund manager Beringea.
If one is going to have a performance incentive fee, that is not an unreasonable system. But I had already told Neal that I considered all performance incentive fees should be scrapped and a simple base fee used instead (as for example Amati AIM VCT use and other VCTs used before performance fees became common). Performance fees do not improve performance because managers have a good incentive to perform to the best of their ability anyway – if they do and the fund grows they get higher fees.
One complication in the calculation of the performance fees is that they are actually calculated separately on each of seven tranches of the funds that have been raised on previous years. There is also an additional PIF performance fee related to two specific investments. In essence, the calculation is so complex that no investor in the shares of this company could ever work it out or check that it is reasonable. I hope the auditors can do so.
The reason for the exceptionally high performance fee last year was explained as being due to the very high dividends paid out, which primarily were driven by the exceptional realisations during the year. Plus some “catch-up” from previous years having passed the hurdles. VCTs cannot generally hold on to cash because the VCT rules require them to reinvest the cash quickly which can be very difficult to do so and shareholders like the tax-free dividends anyway.
Investors have done reasonably well from this VCT (comparing them with generalist VCTs reported by the AIC), but over the last 10 years the average percentage of the year end net asset value represented by overall management and administration fees is 5.5% so the manager has done very well indeed.
The AGM was a fairly trivial event with only I and one other shareholder asking any questions. I voted against the reappointment of Malcolm Moss as I don’t like fund manager representatives on boards of trusts and told the board so – he was not present in person. All the directors should be independent in trusts which he is clearly not.
I asked whether there was any difficulty with the new VCT rules which requires a focus on earlier stage companies. Response was no but there was lots of money in the market so there was lots of competition for new deals and so pricing tends to be high.
I also asked about two of the holdings that suffered large write downs. Due to reduced market multiples on retail and ecommerce companies and underperformance respectively was given as the explanation.
Another shareholders asked about a possible merger of the two ProVen VCTs but it was said there are advantages in keeping them separate – for example it enables shareholders to sell from one trust and immediately reinvest in the other when if they did that in the same trust they would lose tax reliefs.
All resolutions were passed on a show of hands vote, with no significant proxy votes against any of the resolutions except for the remuneration report (4.9% against).
Are shareholders likely to revolt over the high levels of fund management fees at this company? I doubt it, but I think the directors should tackle this issue because the fees are unreasonable. The relatively good performance of the fund manager, which may be partly from chance, tends to end up in the hands of the manager rather than the shareholders. But if the fund underperforms it’s only the shareholders that will suffer.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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