London gets what it asked for with Dan Loeb’s hedge fund fight
Some investors are miffed at the prospect of ending up owning a reinsurance start-up
Daniel Loeb, the founder of Third Point, combines a reputation as a combative activist with a love of yoga and surfing. Critics of his latest deal could benefit from a similar approach: it’s fair to make noise about the combination he is proposing, but when the fight is over their best bet may be to just chill out.
Third Point Investors Limited — a London-listed feeder fund for Loeb’s New York hedge fund — is trying to combine with Malibu Life Reinsurance, which is owned by a different bit of Third Point.
It has given up on being a feeder after years being valued far below its underlying holdings — it traded at an average discount of 18 per cent over the past five years.
But some investors who thought they were buying a hedge fund vehicle are understandably miffed at the prospect of ending up owning a reinsurance start-up.
TPIL offered to buy out a fraction of the shares at a slight discount to book value. But, assuming the deal goes through, dissenters are likely to be left with at least some shares in the new business.
Until recently, this type of related party transaction would have needed approval by independent shareholders, which in this case would exclude Loeb. But now he can vote his 25 per cent shareholding, making the deal harder to block. Proxy advisers ISS and even TPIL’s own broker Deutsche Numis have criticised the terms.
But what was the alternative? Asset Value Investors, the hedge fund leading the opposition, would prefer TPIL wind down and return cash to investors. But that needs approval by 75 per cent of shareholders.
The board could try to apply reputational pressure but Loeb is unlikely to be cowed. So the actual choice for investors is to take a deal that they might profit from, or sit in a moribund fund that will keep trading at a deep discount. As it stands, AVI is still set to make a profit on its original investment.
It’s not like Loeb is taking advantage of some overlooked loophole. Regulators acknowledged the risk of weaker governance when they changed related party transaction rules, but decided it was a price worth paying for a more dynamic market.
Malibu may not be the tech unicorn rulemakers dreamt of attracting, but in the long run it is probably a more appealing constituent than a closed-end fund that trades a handful of shares each day.
TPIL warned investors last year it would consider M&A and “other innovative options” to close its discount, and shareholders knew they were backing a famous hedge fund manager who could block a liquidation and who relishes a fight.
The regulator dived into these waters with open eyes. TPIL’s investors should have done the same — go swimming with sharks, and you should know you might get bitten.