Shareholders in the “C” fund of Foresight 4 VCT are unhappy with the conversion of their shares to Ordinary shares. These holders are former investors in the Acuity VCTs. They feel the conversion is being done on inequitable terms for the “C” shareholders.
Put at its simplest, C shareholders are aggrieved that free and surplus cash in the C fund has not been paid out to them as a dividend before conversion. A large portion of surplus cash within existing C shares could have been paid out at 100% of value but now is being converted into ordinary shares that trade at a 30% discount. Furthermore the recovery of this free cash will take years to be received via dividends on new Ordinaries. Not only will this money be subject to regular ongoing management fees and other VCT charges but will effectively incur performance fee charges of 15% as Ordinary share dividends whereas as the C shares were free of such a fee.
Furthermore most C shareholders are long suffering VCT holders of the failed Acuity VCTs and have been waiting patiently for a substantial exit for many years. Many are also prevented from selling for another two years if they participated in the 2012 enhanced buyback. However they are able to freely receive dividends and thus have again been disadvantaged.
The Chairman of Foresight 4 has stated that the level of cash in the C share portfolio is £5-6m which will be the same as the Ordinary share portfolio at the time of conversion. However since there are twice as many Ordinary shares (38.6m Ord shares vs 18.7m C shares both with roughly equal NAVs/share) it follows that a balanced (cash/equity) conversion should only have been done with half the proposed levels of C share cash.
At a minimum this suggests that an extra dividend of £2.75m on the 18.7m C shares could and should have been paid before conversion. This would represent another 15p/share and such an additional interim dividend should be declared and paid out before conversion to achieve a relative fairness between classes.
A group of investors in Foresight 4 have written to the Chairman of the company on this matter.
Anyone who holds the “C” shares of Foresight 4 should send an email to firstname.lastname@example.org to register their interest.
I am a shareholder, although not a very big one given the historic poor performance. I hadn’t really considered this issue, and having done so I don’t think it’s very clear. On the specific question of the conversion terms, VC valuations are usually conservative so (in effect) swapping cash for shares is likely to be a benefit if anything. Of course the shares are more risky, but the whole point of a VCT investment is to take that risk.
Whether VCTs should in general pay out excess cash is more complex. With low interest rates a large cash holding is a drag on performance, and if the trust is at a big discount you are in effect getting a partial tender at NAV which is attractive. On the other hand, you would hope that the manager is constantly looking for ways to invest the cash – certainly there would be little justification for raising new money if the existing cash can’t find a home, and you might ask whether the manager is good enough.