Harvest Lane Asset Management Abs Return aims to deliver consistent positive rates of return, with low or no correlation to equity markets. It aims to achieve this regardless of underlying market and economic conditions.
It was relatively benign period for the portfolio in the face of broader market volatility, although our mark to market on this occasion was more extreme than normal as we saw multiple spreads widen in the final days of the month well beyond where we would typically expect. As a snapshot in time, share price gyrations don’t always accurately reflect the health of the underlying transactions. For us, it’s an opportunity and historically where we have been able to generate excess risk adjusted returns. We view September’s softness as no different and expect it to self-correct as transactions approach maturity. To a large extent it already has in the early days of October.
And on that note, it’s more of the same; deals are completing, new ones take their place, and a few contested situations are occasionally thrown in the mix for good measure. We are expecting a rush of completions in the lead up to the end of the year (November in particular), which will put the portfolio in a great position to reinvest proceeds into several new and promising transactions.
Global Data Centre Group (GDC.ASX) surged with market buzz over the mooted IPO of Airtrunk. If an IPO or liquidity event occurs even close to the potential valuations being put forward by some corners of the market, it could prove a serious windfall for GDC and its one percent interest. Existing substantial shareholders continue to add to their holdings (as do we!), giving confidence in both the ability to realise assets over the medium term and that carrying values are well supported.
Cirrus Networks (CNW.ASX) returned to the portfolio following an agreed scheme of arrangement with Atturra Limited (ATA.ASX) at an implied $0.053 per share. We have seen a huge amount of consolidation in the broader IT services space over the last few years as players like Capgemini, Brennan, HCL, and even Atturra act as aggregators. Cirrus previously fended off a hostile takeover from Webcentral (WCG.ASX) back in 2021 (at $0.032 per share!) and we have followed the company since – it’s large cash balance, nil debt, and drastically improved earnings in the period since Webcentral’s offer made it an attractive target.
It also, however, made Cirrus an attractive investment in its own right, and Atturra’s offer would need to be at a price shareholders would be willing to part with their shares for. It was evidently not high enough, and it was only after Atturra agreed to increase their offer price to $0.063 four days later that Microequities and H&G High Conviction publicly threw their support behind the deal (no doubt after a few rounds of private negotiations).
To close out the month, Symbio Holdings Limited (SYM.ASX) announced the receipt of a counterproposal from Aussie Broadband (ABB.ASX) in a cash and scrip deal at $3.15 per share. The offer comes in $0.30 above Superloop’s (SLC.ASX) $2.85 offer back in August. Superloop has since clarified that is has no present intention of making a revised offer, but reserved its right to amend that position should circumstances change.
The Aussie Broadband proposal is still non-binding and indicative while it works through three weeks of due diligence. There is no guarantee a binding deal eventuates, but the inclusion of a work fee payable to Aussie if Symbio doesn’t return a countersigned, executed deed (should Aussie table one) suggests it isn’t too keen to come away from the process empty handed.
Given Symbio have flagged intent to support a firm deal on the existing terms, there are very few reasons why the work fee would become payable; namely, a better offer is on the table.
What is Harvest Lane Asset Management Abs Ret Harvest Lane Asset Management Abs Ret is an Managed Funds investment product that is benchmarked against ASX Index 200 Index and sits inside the Domestic Equity - Absolute Return Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Harvest Lane Asset Management Abs Ret has Assets Under Management of 8.35 M with a management fee of 0.87%, a performance fee of 0.29% and a buy/sell spread fee of 0.5%.
How has the investment product performed recently? The recent investment performance of the investment product shows that the Harvest Lane Asset Management Abs Ret has returned 1.11% in the last month. The previous three years have returned 11.64% annualised and 9.44% each year since inception, which is when the Harvest Lane Asset Management Abs Ret first started.
How is risk measured in this investment product? There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Harvest Lane Asset Management Abs Ret first started, the Sharpe ratio is NA with an annualised volatility of 9.44%. The maximum drawdown of the investment product in the last 12 months is 0% and -22.97% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product? Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Harvest Lane Asset Management Abs Ret has a 12-month excess return when compared to the Domestic Equity - Absolute Return Index of 7.17% and 0.01% since inception.
Does the investment product produce Alpha over its Peers? Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Harvest Lane Asset Management Abs Ret has produced Alpha over the Domestic Equity - Absolute Return Index of NA% in the last 12 months and NA% since inception.
What are similar investment products? For a full list of investment products in the Domestic Equity - Absolute Return Index category, you can click here for the Peer Investment Report.
What level of diversification will Harvest Lane Asset Management Abs Ret provide? Harvest Lane Asset Management Abs Ret has a correlation coefficient of 0.64 and a beta of 0.18 when compared to the Domestic Equity - Absolute Return Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers? For a full quantitative report on Harvest Lane Asset Management Abs Ret and its peer investments, you can click here for the Peer Investment Report.
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Performance Commentary - August 31, 2023 A somewhat muted month for the portfolio while reporting season was in full swing. New opportunities continue to pop up at a decent clip as M&A conditions evidently remain favourable, with market commentary suggesting deal pipelines are quickly being restocked as confidence in the local economy firms. A mostly “in line” earnings season points to settled equity markets, and the continued pause by the RBA in hiking interest rates has allowed for a clearer picture of the cost of capital for dealmaking.
These broader themes manifested themselves this month in both InvoCare Limited (IVC.ASX) and Estia Health (EHE.ASX) converting their respective non-binding offers to binding, albeit InvoCare saw the deal struck at a modest discount to TPG’s $13 offer that secured it look at the books. It is nonetheless encouraging that bidder and target are willing to come together on price in the interests of getting a deal done. Estia, meanwhile, got Bain across the line to uphold it’s revised $3.20 per share offer and has already paid out the $0.12 permitted dividend to unlock a further $0.05 in franking credits.
At the smaller end of the market, Ensurance Ltd (ENA.ASX) announced a scheme of arrangement with PSC Insurance Group Limited (PSI.ASX). The consideration offered contains considerable optionality for target shareholders – the exchange ratio of the shares offered was fixed, but there was also a minimum total consideration to be paid under the transaction. Should the bidder’s share price fall far enough and the implied aggregate value is below the minimum threshold, any difference will be topped up in cash. If, however, the bidder’s share price is higher and delivers value above the minimum threshold, Ensurance shareholders reap the full benefit. Certainly, a favourable mechanism from a risk/reward perspective.
Global Data Centre Group (GDC.AX) delivered a promising FY23 result, with statutory NAV increasing $0.20 to $2.13 per share, while the unaudited director valuations put it closer to $2.47. On the back of shareholder support, GDC has transitioned to a medium term strategy of value realisation for its assets and the current carrying values appear well supported. Should the board execute on the medium term strategy, there’s meaningful upside still to realise from the current share price.
With fresh financial statements out in the market, September and October typically see elevated levels of deal activity in the lead up to the end of year holidays. We undoubtedly look forward to seeing if history once again repeats itself.
Performance Commentary - July 31, 2023 July started with a bang! Three deals hit the wires before trade had even started on the first day of the month – two new and one existing. The portfolio already had exposure to all three target companies, albeit in small size. Nonetheless, it provided the platform to close out July in the black and make a good start to the new year.
United Malt Group (UMG.ASX) brushed off some balance sheet concerns to announce that Malteries Soufflet had firmed their earlier indicative offer announced back in March with the $5 per share price tag maintained. Shares jumped from a 12 percent discount to terms to less than 5 percent on the news and closed the month at $4.82. At that price, the market is ascribing a very high chance of success the deal completes (which we would agree with), but also assumes minimal threat of regulators extending out the timetable. We continue to monitor the transaction for a more favourable opportunity to increase our exposure.
Musgrave Minerals Limited (MGV.ASX) found itself on the end of an unsolicited takeover offer from Westgold Resources (WGX.ASX) back in June and had since traded well through terms on the expectation of a bump or even a counterbid. Fingers quickly pointed to Ramelius Resources (RMS.ASX), fresh off the back of their takeover of Breaker Resources (BRB.ASX), as the most likely counterbidder – a lot of the logic underpinning Westgold’s offer was equally applicable to Ramelius.
And so July came and Musgrave announced a recommended offer from Ramelius over the top of Westgold. Interestingly, Westgold’s offer was privately tabled to Musgrave on June 1 before it took its offer public on June 6, while Ramelius signed a confidentiality agreement on June 4. The Musgrave board were evidently working on a better deal for shareholders throughout the Westgold offer period, and that month between early June and early July makes for a good case study on market communication and target company defence while the board worked to secure a superior offer from Ramelius.
Last of the three, Essential Metals (ESS.ASX) announced an all scrip scheme of arrangement with Develop Global at an implied $0.56 per share. The Develop deal follows on from Essential’s scheme with TLEA at $0.50 earlier in the year, which was ultimately terminated back in April after Mineral Resources (MIN.ASX) picked up a blocking stake. We retained a small position (having substantially derisked above terms) while we waited for Mineral Resource’s intentions for Essential to be made clear, which culminated in this month’s deal with Develop.
Performance Commentary - June 30, 2023 A pleasing end to a pleasing year.
It was a reversal of May’s fortunes as a large swathe of the portfolio finished up on the month. Deal flow remained surprisingly strong with several existing positions receiving price bumps along the way. The early days of July has carried the momentum through into the new financial year as the Fund notches a milestone anniversary of its first 10 years of existence. Long may it continue.
Silk Laser Australia Limited (SLA.ASX) was the biggest contributor to performance after Wesfarmers tabled a binding offer at $3.35 per share. As detailed in our last newsletter, we felt the probability of a deal being done was far higher than what the market was ascribing and we had positioned accordingly. The most notable point of the binding deal announcement (to us at least) was what wasn’t there; no indication at all that EC Healthcare’s interest has been officially withdrawn.
Limeade Inc (LME.ASX) announced it would be acquired by WebMD Health at $0.40 per share, an outrageous premium of 325% to the undisturbed share price and one of the largest we’ve seen. In a sign of how far certain technology stocks have fallen though, Limeade is well down from its listing price of $1.85. Tesserent Limited (TNT.ASX) also called time on its tumultuous life on the ASX, announcing an agreed scheme with Thales at $0.13 per share for a comparatively measly 165% premium.
Alloggio Group Limited (ALO.ASX) recut its deal with Next Capital to $0.24 per share on the back of a guidance downgrade in May, and DDH1 Limited agreed a cash and scrip merger with Perenti Limited. There’s evidently plenty happening to keep us busy, the above is just a handful of the opportunities we’re seeing at present.
Finally, discounted Listed Investment Companies (LICs) received notable mentions throughout financial media during the month. A large number of ASX listed LICs trade at meaningful discounts to NTA and a handful of managers in recent years have undertaken initiatives to close the prevailing discount, either via a wind up or conversion to a more liquid, open ended structure.
Our view is that LICs are a fundamentally flawed investment product, and pressure to address significant discounts will accelerate across the board in the years ahead. Indeed, the Australian Financial Review was quick to point out the recent arrival of Saba Capital Management, an investor with a track record of agitating for change at discounted LICs, on the registers of VG1.ASX and PIA.ASX, just two of many that trade at persistent discounts.
The main argument for LICs is that the closed end structure removes redemption risk to allow for a truly long term investment horizon. In reality, many managers run identical portfolios concurrently via open ended vehicles, reducing the closed end counterparts to little more than pots of trapped capital where the manager continues to draw fees regardless of how poor performance may be.
Performance Commentary - May 31, 2023 After a strong start to the calendar year, May saw the portfolio give back some gains in what was best described as a frustrating month. The result was driven by numerous, small paper cuts across the portfolio rather than any one individual position. With the exception of some small de-risking in certain positions where we felt the risk-reward equation had shifted, most losses are of a mark-to-market nature only and we would expect a meaningful clawback should these transactions complete as we expect they will.
Having withdrawn its indicative $12.65 offer last month, InvoCare Limited (IVC.ASX) announced the return of TPG offering $13.00 per share in cash plus a further $0.25 in potential franking credits attached. This time around, however, InvoCare were inclined to play ball should a binding offer eventuate at that price. TPG have been granted five weeks of due diligence access and we would think TPG’s existing 19.3% stake and minimal required bump to get board approval will inspire them to press on and complete the deal.
SILK Laser Australia Limited (SLA.ASX) announced a higher, non-binding offer from EC Healthcare at $3.35 per share, coming in over the top of Wesfarmers (WES.ASX) at $3.15. Wesfarmers declined to take up their matching rights under their Process Deed, and EC was subsequently granted due diligence access. Current market pricing indicates a lack of belief a deal will get done from here, particularly with both bids remaining indicative, along with skittishness over EC Healthcare’s willingness and/or capacity to go binding.
Two weeks prior to submitting its competing offer, EC signed an upsized HK$1b syndicated facility to lock in sufficient financial firepower to complete a SILK acquisition. As a healthcare rollup, the company has a long track record of successful M&A and a founder led shareholder base supportive of the strategy. The company has been keen to stress its growth ambitions outside of Hong Kong and the current offer price for SILK is earnings accretive. Wesfarmers have also notified SILK that they continue to do due diligence, and a mid-month Strategy Day highlighted their hunger to add higher margin, complementary businesses over their API distribution network.
Performance Commentary - April 30, 2023 The portfolio continued its recent momentum to deliver a positive return in April in what was a pleasing result. It was a quieter month than March in terms of news flow however we continue to see interesting opportunities pop up, particularly in areas of the market that aren’t well covered. Binding deals continue to track to expectation but the focus on the month has been caution with respect to anything preliminary.
Firstly, the contest in intelliHR Limited (IHR.ASX) came to its conclusion with Humanforce emerging victor with its on market takeover bid at $0.24. The Access Group gave it a last roll of the dice in early April to offer $0.235, however Humanforce almost immediately went one better to $0.24 and it was enough. An excellent outcome from the first bid at $0.11 at the end of January, which itself was a 75% premium to the undisturbed.
Essential Metals (ESS.ASX) had several twists and turns in the lead up to the shareholder vote for the $0.50 cash Scheme of Arrangement with TLEA. Mid month saw significant buying volume well through terms (as high as $0.585) and 27% of the register changed hands in just four days. Usually, such activity would be a precursor to a counteroffer, however we took the opposite view and sold 90% of the position into the strength. The company has been in play for effectively twelve months and there was an extensive process run to maximise value prior to the TLEA deal being agreed. The urgency of only buying in the direct lead up to the vote suggested to us that this was likely a strategic blocking stake rather than a launchpad for a counter.
Mineral Resources (MIN.ASX), who have been quite active of late, soon emerged as the buyer with a 19.5% stake. It came as little surprise to us when they voted against the scheme, and TLEA walked. Mineral Resources have been accumulating land for exploration potential around their Mt Marion mine, and Essential is within trucking distance.
However, the strategic stake confers optionality and with the TLEA deal broken, there is little urgency while Mineral Resources figures out how best to extract value from the resource. Comments to the media suggest as much. Shares closed out April at a lowly $0.435 and we similarly retain a (very) small position for optionality.
Performance Commentary - March 31, 2023 Another pleasing performance this month with the portfolio finishing in the black and continuing the strong start to the calendar year. After a lull in activity during the holiday and reporting seasons, March roared to life with an influx of new opportunities. One detail to note in particular came while perusing through various scheme implementation deeds and bid implementation agreements – bidders have evidently been keeping tabs on target companies with numerous confidentiality deeds dated as far back as early 2022. Evidently now is the perceived time to strike, and it would be a brave call to suggest there aren’t any more waiting in the wings.
The main contributor to the March performance was undoubtedly IntelliHR (IHR.ASX) that began the month sitting on a conditional, friendly scheme with Humanforce at $0.11 cash per share. The Access Group (TAG) introduced themselves by way of a counter proposal at $0.14 to kick off a month long contest between the two bidders. We enter April with Humanforce sitting unconditional on market at $0.22.
Larger ticket deals such as BHP’s agreed scheme of arrangement with OZ Minerals (OZL.ASX) and Newmont’s non-binding offer for Newcrest (NCM.ASX) have evidently stoked confidence in the materials sector. Ramelius (RMS.ASX) made a strategic move for Breaker Resources (BRB.ASX) as they look to consolidate Breaker’s Lake Roe project into the Rebecca project (acquired in 2021 via AOP.ASX) to form the basis of an eventual broader regional mining hub. Wyloo announced an on market bid for Mincor (MCR.ASX) at $1.40 to mop up the remaining shares not already owned, and Liontown Resources (LTR.ASX) announced it had rejected a $2.50 per share proposal from Albemarle. Plenty happening and undoubtedly more to come.
We saw bumps in Nitro Software (NTO.ASX), where Potentia reached the crucial 75% acceptances level to trigger the increase, and Pushpay (PPH.ASX), with a strong No vote from shareholders pushing BGH to pay more (no pun intended) to get the deal across the line. Having needed to sweeten most, if not all, public to private transactions attempted in recent years, we look forward to seeing where BGH pop up next.
We look to carry the momentum into April with a refreshed opportunity set. Corporate activity remains buoyant, completion rates are high, and indications are it looks set to continue that way for the foreseeable future. As always, we look forward to providing further updates in due course.
Performance Commentary - February 28, 2023 More of the same throughout February with the portfolio closing out the month in positive territory. Almost all positions saw minor fluctuations in their respective share prices, but few had an individually material impact to performance. Things are ticking over nicely – deals are routinely closing and the opportunity set is there to recycle the capital efficiently. Reporting season is now out of the way, and a market awash with fresh financials drives our expectation that M&A will increase in the months ahead.
The Perth Basin contests in Warrego Energy (WGO.ASX) and Norwest Energy (NWE.ASX) drew to their conclusions. Mineral Resources ended the three way stalemate for Warrego by folding into Hancock’s cash offer to hand them control. Strike then relinquished its stake with the writing very much on the wall and Hancock moved to compulsory acquisition by month end. Mineral Resources similarly secured a controlling interest in Norwest before announcing their offer as “Best and Final” in early March. Both positions were realised with the transactions at their logical conclusions, capping off some outstanding returns achieved over the last few months.
US Masters Residential Property Fund (URF.ASX) moved higher on the back of the ongoing buyback and a better than expected set of financials. The externalisation of management to Brooksville and Pinnacle in January should help deliver substantial value. The managers are incentivised to return capital “expeditiously” and a hurdle rate of $0.40 + 8% p.a. before performance fees are drawn aligns them with URF unitholders. Accruing performance fee provisions in the half year accounts rather than flagging a contingent payment speaks to the Board’s confidence that the hurdle rate will be exceeded.
The lowest hanging fruit for Brooksville and Pinnacle to hit the earnouts is the URF unit price itself. Against a post tax NTA of $0.61, the units closed the month at a 50% discount. It is then little surprise the board asked for approval for another buy back for 25% of the register and that unitholders would be so obliging. We can only hazard a guess what the US$30m cash balance at year end (with further asset sales pending) will be put towards! In an aggressive move, Alludo declared it’s $2.15 unconditional offer for Nitro Software (NTO.ASX) as “Best and Final” even if a superior offer emerged. The move played to a catch 22 on underbidder Potentia’s $2 per share offer – Potentia were unwilling to increase their offer price without access to due diligence, but Nitro’s ties to Alludo meant Potentia couldn’t get due diligence unless it increased its offer. Put up or shut up.
The move backfired and Potentia took the advantage. With Alludo unable to increase its bid, Potentia flagged it might lift their offer to between $2.20 and $2.30, but it would need a look at the books first. With the minimal conditions attached to the offer and a clear path to a superior outcome for shareholders, fiduciary duty kicked in and Potentia got its access. The result was an increase to an unconditional $2.17 per share. If Potentia received 75% acceptances, this would increase to $2.20 and further to $2.25 if a certain amount of the 75% acceptance took the scrip consideration instead of cash. It’s now a question of what the final consideration will be, rather than which bidder will win. Well played Potentia.
It’s pleasing to begin the year in a strong position and conditions remain favourable for the strategy moving forward. March has already seen a counteroffer in intelliHR (IHR.ASX) at a 27% premium to the existing bid. If anything, it shows M&A activity remains robust and we intend to take full advantage. We look forward to providing further updates in due course.
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