Trustee bodies are swiftly offloading assets at a reduced price
In a recent development, Bagnall Energy, an inheritance tax relief investor, has made a bid for Downing Renewables & Infrastructure (LSE: DORE). The bid, which is a 23% premium to the undisturbed share price, is, however, at a 7.5% discount to DORE's net asset value (NAV) adjusted for the next dividend.
The bid has sparked debate among DORE's shareholders, with the board claiming that the offer is "in the best interests of DORE's shareholders as a whole". However, long-term investors may disagree.
The NAV of an investment trust like DORE represents what would be left if all its assets are sold and liabilities are paid off. DORE, which appears to have a decent portfolio of assets and seems to be performing fairly well, has net assets of £191 million.
The discount in the bid for DORE is a common occurrence in the buy-out of funds investing in unlisted assets such as private equity, real estate, and infrastructure. These offers are often below the NAV because they reflect practical market realities and risk considerations.
The illiquidity and marketability discount, transaction costs and time, risk and uncertainty, and strategic reasons are some of the key factors that contribute to the discount. Unlisted assets are not traded on public markets, so selling them often requires a discount to NAV to attract buyers willing to take on the added illiquidity risk.
The process of selling complex assets like real estate or infrastructure can be lengthy and expensive, so buyers factor these into their price offers. Private equity valuations may be based on models or assumptions that don’t fully translate into realizable market value; buyers demand a discount to compensate for these valuation uncertainties.
Accepting a lower price may be prudent to liquidate positions, meet investor demands, or redeploy capital more effectively. The recommended discount is a bargaining outcome balancing theoretical NAV against real market conditions, buyer risk appetite, and fund strategy.
NAVs for funds investing in unlisted assets can be calculated using methods like recent private transactions, prices of comparable assets, net present value based on forecast cash flows, or other methods. Despite being estimates, it is hoped that the assets should be worth close to the NAV in a non-forced sale.
In the case of DORE, Bagnall Energy has been invested since the initial public offering and has increased its stake from 16% in early January to 25% by mid-February, giving it a blocking vote on other bids. This development adds another layer of complexity to the bid situation, as the enlarged stake could potentially influence the final outcome.
The consolidation in the renewables sector is inevitable, especially when discounts remain this large. The bid for DORE is just one of many examples of this trend, as investors seek to capitalize on the sector's growth potential while navigating the complexities of unlisted asset valuations.
Long-term investors might argue that accepting a discount to the net asset value (NAV) of Downing Renewables & Infrastructure (DORE) could limit their potential returns, as the bid by Bagnall Energy is a 7.5% discount to the adjusted NAV. The illiquidity and marketability of real-estate assets, such as those held by DORE, often contribute to the discount in buy-out offers, as selling these assets requires attracting buyers willing to take on the added illiquidity risk.
