Activist battle looms for troubled property fund
E&P Financial Group and K2 Asset Management are in battle with an activist manager around the best way to handle the troubled US Masters Residential Property fund (URF).
Launched in 2011 by Evans Dixon (now E&P Financial Group), the URF invested in residential property within undervalued neighbourhoods in New York.
However, over the past five years to 8 June, URF had lost 81 per cent of its value compared to returns of 16.5 per cent by the ASX 200 over the same period.
In September 2020, the Australian Securities and Investments Commission (ASIC) launched court proceedings against Dixon Advisory for advising clients to invest in the product or URF-related products between 2 September 2015 and 31 May 2019.
On 8 July 2021, ASIC and Dixon Advisory entered into a heads of agreement to resolve the civil penalty proceedings following court-ordered mediation. It proposed Dixon Advisory pay $7.2 million for breaches of the Corporations Act and $1 million for ASIC’s costs and legal proceedings.
In a bid to return capital to unitholders and narrow the discount to NTA, E&P started the hunt in March for a new responsible entity (RE). This followed both investor feedback and a decision by E&P Financial Group to exit its non-core business activities.
Unfortunately, the decision had now turned into a war of words between E&P, its chosen RE, and the fund’s largest shareholder.
On 15 May 2023, it was announced that K2 Asset Management (K2) had been selected by E&P (E&PIL) to take on the RE role for the fund.
“The focus is on maximising returns to investors and implementing strategies to narrow the discount through a combination of special distributions, a robust buyback strategy in line with asset sales,” K2 detailed.
Votes are expected to be held on 19 and 27 June and the RE role would take effect upon the vote passing.
However, the plot thickened in early June when it was announced the fund’s largest shareholder at 12.7 per cent, Sydney-based Samuel Terry Asset Management, wanted to reject K2 appointment.
Founder and managing director, Fred Woollard, stated in an open letter: “After careful consideration and consultation with other large unitholders of URF, Samuel Terry has concluded that the K2 Proposal is not in the best interests of URF unitholders and intends to vote against the K2 proposal at the EGM.
“Further, Samuel Terry understands that several other large unitholders of URF are likely to vote against the K2 proposal. Consequently, Samuel Terry believes it is unlikely that the K2 proposal will be approved by URF unitholders. Samuel Terry is opposed to the K2 proposal because it believes that URF unitholders would be much better served by having an RE who is only accountable to URF unitholders and is overseen by a group of URF unitholders.”
Instead it proposed an internalised RE that it felt had the potential to deliver a “far superior outcome” for unitholders.
Reacting to the news on 6 June, K2 stated this would be an unsuitable option for the beleaguered property fund.
“There are some suggestions in the market that alternatively propose an internalised RE structure or unitholders being the RE,” it said in a statement. “This is in our opinion inappropriate with the potential for multiple conflicts of issues. We believe this is not in the fund’s best interests.”
It reiterated feedback to its earlier RE announcement had been “exceedingly positive”.
In a further ASX statement from E&PIL on 8 June, it confirmed that it wanted K2 as the preferred RE.
“E&PIL conducted a comprehensive process to select an external professional third-party responsible entity to replace E&PIL, ultimately nominating K2 as the preferred party. This decision is based on a range of factors, including K2’s extensive experience and expertise in the provision of RE and trustee services and its competitive fee proposal,” it said.
“E&PIL continues to remain supportive of the recommendation that unitholder vote in favour of the proposal to appoint K2 as the RE for URF at the extraordinary meeting of URF unitholders on 19 June 2023.”
If the vote to appoint K2 was unsuccessful, it said it would consider alternative proposals.
AUTHOR
Laura Dew
Recommended for you
Amid a growing appetite for alternatives, investment executives have shared questions advisers should consider when selecting a private markets product compared to their listed counterparts.
Chief executive Maria Lykouras is set to exit JBWere as the bank confirms it is “evolving” its operations for high-net-worth clients.
Bennelong Funds Management chief executive John Burke has told Money Management that the firm is seeking to invest in boutiques in two specific asset classes as it identifies gaps in its product range.
Responsible investment performance concerns have lessened as the market hits $1.6 trillion in AUM, according to RIAA’s annual report, but greenwashing fears among asset managers are on the rise.
