Should the global fund management industry decide to hold a popularity contest, you can be sure Peter Everington will not make it past the first round. In fact, he might not even be invited to participate.
Nor is Everington a favorite among the management teams of those publicly-listed Asian companies that prefer to avoid being accountable to shareholders. That’s because, in his capacity as chairman of Hong Kong-based Regent Fund Management, Everington – together with his partners Jim Mellon, Jayne Sutcliffe and Sophia Shaw – has built a $2 bn business by ‘cracking’ open poorly performing closed-end mutual funds.
Making a mark
It is this raiding of investment funds that has made Regent famous, or infamous as the case may be, in the international investment arena. The firm’s prime occupation in this area is to identify those funds that are trading at a deep discount (30 percent or more) to net asset value (NAV).
When such a vehicle is spotted, Regent will first buy into the fund in size and then attempt to band shareholders together in order to force management into moving the closed-end fund into an open-end fund. This cracking open process alleviates the discount as the fund begins to trade closer to its net asset value and, all things being equal, a tidy return is duly registered for the shareholders.
Since Regent first launched operations back in 1990, Everington and his colleagues have made their mark by aligning the firm against the conflicts of interest that are inherent in a financial industry where economies of scale and consolidation are of increasing significance. With banks now owning insurance companies as well as brokerage houses, the effects of this consolidation on the fund management industry are the primary concern of Regent. Using loopholes in the corporate governance framework of mutual funds, the firm sets about creating value for closed-end fund shareholders while securing returns for its own stakeholders.
‘Only an independent player can do something like this,’ claims Everington. ‘The industry could not have ING Barings cracking open GT funds or vice versa. That would create chaos.’
So Regent has chosen to take on that role itself. ‘And it has not made us popular,’ notes Everington. ‘But that doesn’t hurt our feelings one bit. Clearly, the reason these funds are selling at these huge discounts is that fund managers are collecting assets and paying little attention to value. For such managers, the market value does not count as much as the asset value on which fees are calculated. The fund is seen as a pool of money on which the fund manager is paid a permanent annuity.’
Regent’s reach
Regent currently operates in four areas: a dedicated fund group is designed to crack open closed-end investment funds; a hedge fund group looks for market neutral arbitrage opportunities, hedges underlying positions and makes leverage possible for raiding teams; a private equity arm looks for distressed investments in Asia; and a focused mutual fund group has become one of the largest foreign investors in Russia and eastern Europe.
Publicly listed on the Hong Kong Stock Exchange, Regent is one-third owned by its management, one-third owned by strategically connected institutions and one-third owned by public shareholders.
In most cases fund shareholders are supportive of Regent’s cracking open efforts. Indeed, the only opponents are the fund management companies and the parent companies that control these firms. ‘You perform this cracking open exercise a few times and you end up cleaning up the industry,’ says Everington. ‘It is an absolute disgrace that the industry sits on these funds with huge discounts and churns out more funds to be stuffed by their broker affiliates into captive distribution chains.’
It was in 1992 that Regent made its first raid. The victim in that case was Malaysia Capital Fund run by MeesPierson. Malaysia Capital was placed through the distribution network of a Citibank subsidiary, Vickers da Costa; and some 25 percent of the fund was sold to Citi’s private banking clients.
In the end, the private client managers at Citibank were so angered by being stuffed with the Malaysian fund that the unit finally decided to support Regent Fund Management’s initiative. In other words, Citibank private clients were talked into going up against Citibank’s fund management unit and brokerage operations.
Two dozen & counting
So far Regent has broken open over two dozen funds, with the biggest victory to date being its high-profile raid on the $650 mn GT Chile Fund. Today, a set of funds are dedicated solely to raiding. Specialty units target real estate funds in Australia and mutual funds in Taiwan. A more broad-based team is designed to deal with the other regional and international opportunities.
With dedicated raiding vehicles putting up to 25 percent of their assets in a single target, the risk is great, and the hedging unit mitigates risk. With a hedge in place Regent can raid funds with narrower discounts through neutralizing the underlying assets by shorting positions. At that point, the market movement makes no difference and attention is placed on reducing the discount.
‘Originally when we started this business, brokers saw us as a threat. Eventually they realized they could make fees deconstructing these funds as well as constructing them,’ says Everington. ‘Brokers are an ally because they know where fund shares are held. That is one of the great stupidities about the fund management business. The shares of these funds tend to sit in one centralized clearing system under a nominee name. In 95 percent of the cases funds do not know who the nominee holder is. Just consider the absurdity of being in a business where you do not even know who your clients are.’
With the advantage of understanding how to communicate with investors and how to work within the corporate governance system, Regent has turned its attention to unlocking value in Asian and non-Asian companies. Everington believes the corporate governance process is now moving into high gear in Asia, and it may not be long before shareholder rights becomes a growth area.
Still, Everington does not believe corporate governance is meaningful without cleaning up corruption. ‘Someone once said the definition of reality is that it is an illusion brought about by insufficient alcohol. It was obvious what was going on in these markets,’ he says.
‘Look at Indonesia,’ Everington goes on. ‘Any fund manager who lost money there does not deserve any sympathy. Fund managers knew very well that the Suharto regime was terribly corrupt. If people lost their shirts it was because they had no sense of reality. Asia is in a bubble and this bubble is kept inflated by corruption. Until the bubble bursts such issues as corporate governance will not be meaningful.’
Moral bankruptcy
Everington doesn’t only blame the Asian system for its economic hardships and lack of interest in underlying shareholders. In his mind, this was made possible by the actions of many fund managers and bankers. ‘When it comes to corruption there is always a counterparty,’ he notes. ‘Moral bankruptcy came about after the bail-out of the American savings and loans industry and by the rescue of the Japanese banking system. That created an environment of easy money. Now everyone understands the way to rescue a banking system is to print money. In the case of Japan, much of this money ended up in US treasuries which in turn released cash to drive the equity bull market.’
In a forthright manner Everington makes it clear that his emphasis on corporate governance is a mostly selfish one – to make money for his clients and therefore for Regent itself. ‘Some of our competitors would say we are a bunch of carnivores. But they would say that – we are breaking up their funds and attacking management of badly-run companies,’ he says. ‘Still, we come under great scrutiny by regulators and we need to be whiter than white ourselves as a result. That is why we think our internal corporate governance is very good.’
High profile attack
In Asia, Regent has been involved in a number of corporate governance battles. By far the most high profile is that of Pioneer Industries International. Pioneer is Regent’s first foray into corporate governance in Hong Kong at the corporate level and Everington maintains there is no more badly-run company on the HKSE. To unlock the huge discount within Pioneer, Regent entered into a two-year fight. So far, it has come out on the losing end. It tried various steps but found management had a far greater control of the shareholder base than originally anticipated.
Regent’s governance battles are not restricted to Asia. Two years ago, it bought 4 percent of Hambros and started rattling the cage of the City’s establishment. When Regent bought in, the share price was at the same level as a decade earlier. Regent believed the company was badly run and needed a change but Everington admits to underestimating the scale of Hambros’ position as a City stalwart and believes his firm’s approach was initially too brash to win many allies. However, when Hambros was caught spreading insider information on its corporate advisory front, the tables were turned. The City realized that Hambros was out of control and self liquidation ensued.
With the setting up of the private equity fund Regent is turning its attention back to Asian management teams. ‘Investors will have more to say and corporate governance will be one way of exercising our rights,’ concludes Everington. ‘Many management teams have made mistakes and are leveraged to their eye balls. Sound management principles must be brought to bear. It’s time to run companies properly and the market is talking. Management is being called to account. With one-third of public companies bust in Asia, and that figure rising to 90 percent in Indonesia, things have got to change. The sooner they do the sooner investment will begin to flow once again.’
